Market downturns aren’t just scary, they can be traumatic. But they’re also frequent and, fortunately for investors, typically short-lived. The most common triggers are disappointing economic data, major bankruptcy, or a global crisis. But even a small initial wave of selling often sets off a chain reaction that destabilizes markets and shakes confidence.
A stock market crash can lead to severe losses in an investor’s portfolio. The best way to reduce the risk of such losses is by diversifying your investments across different asset classes.
Many crashes are the result of excessive speculation, high levels of leverage, or other underlying vulnerabilities in financial systems. In the 2007/08 global market crash, for example, the collapse of mortgage-backed securities in the housing sector triggered a widespread banking crisis that quickly devolved into a global financial crisis, causing a sharp drop in stock prices and a broader reduction in commodity prices.
The resulting recession caused a dramatic drop in the US stock market. Moreover, it also led to a decline in global stock market indices, which was exacerbated by fears of an extended trade war and rising inflation. These events were likely to cause significant financial anxiety for individuals, particularly in the United States. Using data on comprehensive medical records, we found that, for respondents who owned stocks and mutual funds but not IRAs, a 1% standard deviation decline in the local stock market increased antidepressant prescriptions by an average of 0.42 percent. The effect was more pronounced among those most exposed to the crash.
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