101-03 Stock Market Booms & Crashes

How global events can affect your investments

All of our investments are subject to global environmental and economic events.  In this section, we explore these factors

Boom & Bust Cycles

The financial crisis of 2007-2009 is nothing new.  A crisis occurs every 20 years or so where some event occurs to cause a correction in the markets and widespread panic to investors. The recent credit crisis is different only in the fact that the pullback was so rapid and volatile. The SP-500 had pulled back to the 2003 lows in 3 months. When the tech bubble burst in 2000, it took 3 years for that pullback to happen.

Depressions, Recoveries, Recessions
The major booms and busts in the stock market for the last century.

The health of the banking system

Massive failures in the bank’s risk management and a lack of regulation has largely been attributed as the main cause, of the domino effect that started the financial crisis.

Demand downturn

Consumer and industrial demand is an important factor in the health of the economy.  If this is affected negatively it can impact nearly all investment types.  During the financial crisis of 2008, a demand downturn occurred creating an even bigger impact, as people were already in debt and could not finance new debt. Therefore they reduced their spending.

Increases in unemployment

As demand reduces, so we need fewer jobs to make the products that nobody wants anymore.  This means fewer people buying products, this then affects the profitability of businesses.

Developed world debt

The developed world has taken on too much debt lead by the U.S.  Even the solution to the financial crisis was to take on more debt to create the stimulus package to be able to kick start the economy and create jobs.

Political unrest

Continued political unrest destabilizes regions and is not good for business.  What is not good for business is not good for your investments

Economic policy

Economic policy can seriously affect investments.  Both monetary policy (the control of money) and fiscal policy (the control of spending) can have an impact.  The goal of central banks is to control inflation and manage the money supply to achieve growth.  If inflation rises this is very bad for stocks and diminishes stock market returns.

The Latest Crash – Corona 2020

To put into perspective what could happen in the current market climate is always helpful to study historical market behavior.

For this analysis, I am using Gann Boxes a great drawing tool from TradingView.

Although each market cycle is different in duration, boom, and bust, they share one common characteristic.

The ability to be unpredictable, erratic, and wipe out wealth.

Another trait they all share is the ushering in of a new era of wealth building.

Only the new era that we face may be built on deflation, significantly weakened currencies, and potentially a new world order. Additionally, in the west, the distribution of wealth is very seriously skewed toward the super-rich.  Things will need to change.

The Corona Crash in 2020 Compared to the Last 4 Crashes
The Corona Crash in 2020 Compared to the Last 4 Crashes

Anatomy of wealth creation and destruction.

  • The 60s and 70s ended with an 80% loss of gains accumulated.
  • The 80s ended with Black Monday which wipes out 38% of gains (relatively mild)
  • The Dotcom Bust wiped out 60% of gains
  • The Financial Crisis wiped out 100% + of gains

So far, the Corona Crash has been relatively mild, thanks to massive government intervention, with currently 25% of gains lost.

The question you must ask yourself is:

Is this the end of the crash?  Is the retracement of the market commensurate with the actual economic activity & jobs market collapse?

Just be clear all options are on the table, including a retracement to Zero, for the S&P this is close to 700 points.

No one knows the future as we humans are notoriously bad at predictions.

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