Why does the stock market fall? Stock market crashes are sudden, dramatic declines in stock prices, resulting in a significant loss of paper wealth. They are caused by panic selling and underlying economic factors and usually follow periods of economic speculation and bubbles. The stock market has a natural tendency to fluctuate wildly and are subject to a wide variety of forces, including cyclical factors, economic crises, and monetary policy.
The S&P 500, Nasdaq, and Dow all had their worst month of the year in September. In fact, the S&P 500 and Nasdaq experienced their worst monthly declines since March 2020. The Dow dropped 4.8%, the S&P 500 lost 2.8%, and the Nasdaq tumbled 3.8%. What does this mean for investors? We may be seeing the beginnings of a major stock market fall if these key indicators continue to fall.
There are many reasons for the fall in the stock market, including a wide range of economic factors. Despite the fact that the US economy is doing well, investors are worried about a prolonged outbreak of the coronavirus. While it hasn’t caused a substantial slowdown, it has affected small businesses. The White House also boasted that the United States economy is growing faster than any other country. The faster wage growth leads to more short-term loans, which increase the risk of inflation. To control inflation, the federal reserve often raises interest rates. This increases interest rates and negatively impacts both retirement and investment stocks. This is a major factor in stock market trends.
In addition to news about the economic outlook, investors are skittish ahead of the French presidential elections, where Marine Le Pen may overturn the incumbent Francois Macron. That could fuel more volatility on the markets. The stock market fell nearly 18% Thursday, as Gap Inc. GPS reported a bigger-than-expected sales drop. Gap also announced the resignation of its CEO, Nancy Green. American Express Co. AXP also slipped, despite beating earnings expectations. However, it’s a big concern as it continues to rebound with younger consumers and travel.
While there were many contributing factors to the 1929 stock market crash, rampant speculation was the most prominent cause. People who bought stocks on margin were still owing money to entities that gave them loans. The Federal Reserve also tightened credit in August 1929 and increased its discount rate from five percent to six percent. The proliferation of holding companies also tended to create debt. In November, an economic recession had already begun. After the stock market fall, the economy began to slow and the stock market subsequently crashed.
The rise of interest rates has also made investors rethink whether certain stocks will do well in an environment of higher interest rates. This uncertainty is a significant contributor to fewer risk-taking investors, particularly in tech companies. As interest rates increase, borrowing becomes more expensive and investors are reluctant to take a risk on these stocks. The market’s downturn, in fact, has wiped out nearly $3 trillion of retirement savings. However, the fall in the stock market is far from over.
