A brief history of stock market crashes and possible triggers

American Union Bank in New York at the beginning of the crash

The next stock market crash will inevitably come…

Since 1623, there have been some fifty stock market crashes around the world. That’s one every 7.8 years on average.

Twelve of these crashes have occurred since 2000. That’s one every 1.5 years recently.  The last one on record was two years ago when, on August 18th, 2015, the Dow Jones fell 1,300 points over three days between August 18- 21. An estimated ten trillion dollars was wiped off the books!

A brief history of prior crashes

The origins of the fifty crashes are interesting and varied.

Bubbles feature quite often, from tulips in the Netherlands in 1637, to the great crash of 1929, interestingly caused in part from unrealistically low interest rates in the 20s and then the bursting of the tech bubble in 2000. The cause of other crashes include:

  • The assassination of the U.S. President McKinley in 1901
  • The San Francisco earthquake of 1906 which threatened to suck liquidity into the rebuilding effort
  • A threat to curtail the power of monopolies in the U.S. in 1907. Could efforts to curtail the powers of social media and tech companies see history repeat itself?
  • Doubts about the effectiveness of U.S. government policy, in 1937. Brexit in 2017/18?
  • Oil price shocks in 1971 and 1973 combined with the miners’ strike and the invasion of Kuwait by Iraq in 1990
  • September 11th, 2001 followed by dramatic stock price declines in 2002 – the insurance bill itself was over $40 billion
  • Company failures, such as Lehman Brothers and Icelandic banks in 2008
  • Government debt failure, such as the Greek debt crisis in 2010

What is clear is that a loss of market confidence can be triggered from anywhere, at any time and we will probably not see it coming, at least not from afar.

Possible triggers of the next one?

Where do we start? It’s pure speculation, but here are just a few possible candidates, in no order of likelihood or possibility:

  • Current stock market valuations, while not considered to be in bubble territory, are historically high. The bulls take comfort from recent earnings reports which have been supportive. However, the bears wonder if companies can keep delivering these impressive growth numbers, especially the tech stocks. What if the take up of the new iPhone X is less than impressive?
  • Support for current equity valuations rests to some degree on President Trump’s promise to reduce U.S. corporation tax and to expand infrastructure spending. If these initiatives are bogged down in the Washington swamp, it may result in a change in market expectations.
  • A debt crisis. Debt is all around us and growing, from UK consumer debt to Chinese debt and government debt, but market concern has been subdued thanks to central banks’ quantitative easing and low interest rates. The debt market is now heavily skewed with even junk bond interest rates unnaturally low. Ten-year bond yields in Italy have traded below their United States equivalents since the ECB started its bond buying program. At some point, central banks will let the markets return to something approaching normal with significant impact on valuations and expectations.
  • Quant-focused or algorithmic trading is now estimated to have close to one trillion dollars of assets under management, gaining nearly $5 billion in the last quarter alone. They are now the single largest market trading participant with a 20% share but worryingly all pursue very similar strategies. When one computer says ‘sell’, the others will likely follow, perhaps in seconds.
  • Added to this concern is the meteoric rise of passive index investing, largely expressed through Exchange Traded Funds (ETFs) which now have some $4 trillion of assets and which naively follow the market, whether up or down.
  • A geopolitical event, such as increased tension on the Korean peninsula or China sea.

Definitions

  • crash – when the major stock indices fall 10% or more within a day or two
  • correction – when the major stock indices decline 10% over a week or more
  • bear market:     When the major stock indices fall 20% over two months or more

More on stock market crashes

This is part 1 of a 4 part series on stock market crashes.