We certainly have a terrible year behind us. Not saying that this one is pandemic-free, the nightmare seems far from over, and while the main suffering caused by COVID-19 is in human lives, at one point, the world’s economy was in huge problems as well, and for some, it still is.
Anyone interested in finance remembers how fast the stock markets have crashed. But to the surprise of many, the markets then had a huge recovery, better than anyone could hope for, and perhaps we were all just too pessimistic, which is normal when we think about it. Nevertheless, the recovery is astounding.
The main reason for this renewal lies with the Big Tech companies and the Federal Reserve stimulus. That is why so many of us were optimistic for this year and for the years to come. After all, with vaccination being done worldwide, it is expected that the stock exchange continues to improve.
So if you share this optimism and are interested in trading stocks, be sure to check out beststocks, but if you are still wondering if it is possible to predict when the stock market is going to crash, we will further discuss this topic in this article.
Previous market crashes
Before one can foretell the future, one has to know and understand the past. So let us briefly examine the most consequential clashes in the stock exchange records. The first one is probably the most famous one of all, the one that happened in 1929, and for almost ten years market was recovering from this blow. What mostly helped the economy grew after this one is the industry developed in World War II.
Then we have another significant crash that occurred in the year 1987, which today, we remember as a Black Monday. On that day, almost a quarter of the market’s value was lost, but this time, it took only two years for complete recovery. The next one is also pretty infamous. The attack on the Twin Towers in 2001 created a fall in the market.
But once again, everything was revived in record time, with only a few months needed for that. Then we had one that marked many of our lives, which happened in the year 2008, as it was one of the biggest market crashes in history. But in a few years, the market has not only recovered but was more potent than prior to the crash. The rise continues all the way until the one in 2020, caused by the pandemic, and in terms of how fast the crash happened, this one was for the record books.
There was global devastation of enormous proportions as well. However, the trend of fast recovery continued. In a remarkably short period of time, most of the stocks were better than they were prior to the crash.
So what can we conclude from this brief history lesson? First of all, it seems like all of them tend to happen because of some extraordinary event on which the market has little influence. A great example of that would be the terrorist attack and the COVID pandemic. Furthermore, the stock exchange has become much stronger since 1929, and now, even when the crash happens, the recovery is extremely fast. In our opinion, this is a reason for optimism.
But if someone wants to trade in the stock markets, the fact it can recover fast means little. There is a more relevant question that is giving us a headache. The one being, what are the signs that the stock market might be close to crashing. One of the most crucial pointers would be rampant speculation. What does that mean? That means that a bubble is being created in the stock market. There is a positive feedback circle that becomes part of how the business is done. This bragging without foundation leads to the stock value rising beyond its true worth, hence, the bubble we mentioned.
The fact that the stocks are high becomes a reason why there is an expectation that they will continue to rise. Since none of this has any coverage, a crash becomes the only way out. That is the most important red flag that there is something wrong with the market. After all, this is what happened in the 2008 crash precisely. Now, this doesn’t mean that some small bubbles will have tremendous consequences, as some lesser changes can fix those problems. So what to do? While these bubbles look like an excellent opportunity to earn money, they come with a risk of losing too much. It would be for the wisest to avoid them.
Optimistic but careful point of view
Whether you can successfully predict the market crash will most likely involve a bit of luck. The fact of the matter is that it is certain, and these crashes will happen. If you are someone who wants to trade with stocks, sooner or later, this will be a part of your career. Of course, you want to predict them, but that doesn’t mean you should panic every time you have a valid reason to think the market will crash again.
And here is where the biggest problem is, there is often a good reason for believing the market will suffer some misfortune. Let us give you an example. In May last year, many of us expected the second crash right after the first one. And there were good reasons for that. There were so many people who lost their jobs, so many businesses bankrupted, and COVID-19 cases just kept rising. But while everyone expected it, a second crash didn’t happen. That is why it is crucial not to be too pessimistic about stock markets.
As we have discussed, there are some great ways to have an educated guess will a stock market crash happen. But we have also seen that there is no certain, one hundred percent sure, way to know that. In the end, being careful and analyzing everything you can is a smart thing to do, but with stock trading, a bit of faith is sometimes necessary. After all, if you take no risks, you will make no profit.