A global market crash is a dramatic decline in stock prices, resulting in a substantial loss of paper wealth and usually triggered by underlying economic factors. While crashes are devastating, they also serve as reminders that markets recover—and that long-term investors who stick with their plan and stay invested through turbulent times will ultimately reap rewards.
The collapse of US financial firm Lehman Brothers in September 2008 sparked a global recession as debt problems rippled across the financial system, triggering panic selling and a global liquidity crisis. Investors pulled money out of banks and investment funds and froze lending, leading to financial markets becoming dysfunctional. Businesses were less willing to invest, and households were less likely to spend, adding to a downward spiral.
Investors rushed to sell their shares, as evidenced by the steep decline in India’s Sensex during its crackdown on black money in November 2016. As the price of oil declined, demand for energy stocks fell and accelerated the decline. Many investors used automated program trading to sell when prices fell, increasing the speed of the downturn and exacerbating the losses.
A global market crash is typically preceded by a period of volatility, as investors struggle to understand why prices are falling and can’t fathom that a sustained downturn is in progress. This phase is called the denial stage, and is characterized by short-term price fluctuations as some investors try to convince themselves that low prices aren’t as bad as they seem.
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