Stock markets are cyclical machines. They move ahead in a wave form instead of a straight line. And you may ask, what is the core characteristic of a wave? Well, waves move in peaks and troughs. What goes up comes down and what goes down comes up. This cycle goes on indefinitely. Stock markets are no exception to this and they have been following this pattern religiously for the past 400+ years.
Ups & Downs
Stock markets are a mirror of the economy. They represent the most accurate picture of the current state of affairs in a country like India or a region like Europe or the whole of the world. But for the markets to fall down or climb up, the most important element is the “trigger”. It’s like the stock markets adhere to the Newton’s First Law – a body in motion stays in motion unless acted upon by an external force. So these trigger events serve as the external forces that turn the tide in stock markets. These events can be political, social, economic or natural. The current stock market fall of 2020 is due to the natural trigger – the coronavirus pandemic.
The Stock Market Crash
A stock market crash occurs when the downfall is sudden, quick and drastic. Occasional market downturns that occur gradually are common and are treated as business as normal since they are not drastic. So let’s first understand how do we define a stock market crash.
- -5% fall is a “Pullback”
- -10% fall is a “Correction”
- -20% fall is a “Bear Market”
- -35% fall is a “Market Crash”
- -50% fall is a “Recession”
Well, recession is not really a stock market definition but instead an economic indicator of a slowdown. Technically recession is defined as a period when the GDP of a country falls for two consecutive quarters. But when markets are down 50% or more, we’re almost always in a recession.
There have been numerous stock market crashes in India in the past. Still every crash seems like a doomsday scenario and it feels like the “world is coming to an end”. There is negativity all around and nothing seems to be right. Companies are going bankrupt while banks are falling down. All hope is lost. But remember stock markets are cyclical machines! What goes down, comes up and vice versa. And every crash till date is followed by a recovery and a great one! In fact, every fall has served as an opportunity to earn great returns from the stock markets. But this “opportunity” looks good only in hindsight. It’s difficult to spot and utilize this opportunity when you’re standing at the center of a market crash. As they say, an investor needs to go through and survive at least two stock market crashes to be able to capture this opportunity in the next crash. It is easily said than done.
The coronavirus crisis has brought the world economy to a grinding halt. Global markets are severly hit and India is no exception. As we are currently in the middle of a stock market crash in India, let us look at the biggest stock market crashes in the last 20 years and how the markets have recovered post those crashes.
Biggest Stock Market Crashes
Return Period: 3 years after the market bottom
Source: IMF, NSE