With investment markets going through a volatile period, below we provide some timely commentary from global fund manager VanEck. This investment manager explains just how common market hiccups are, with an Australian focus.
The truth is that market crashes are more common than we often realise.
In the 50 years before the Wall Street crash of 1929, the US stock exchange experienced no fewer than seven financial crises (the credit shortage of 1884, the 1893 economic depression, the panics of 1896, 1901, 1907, 1910-1911 and the Great War).
Throughout history, financial markets have experienced periods of significant turbulence. These can be due to:
Historical patterns demonstrate that despite short-term turmoil, markets have shown long-term resilience. Understanding past crashes and their recoveries provides essential insights for today’s investors.
In the recent past, we have experienced each type of market crash:
1 – Economic downturn – 1990s recession – In 1994, the Australian share market experienced a significant fall due to the ongoing effects of the early 1990s recession, which was primarily caused by the high interest rates implemented by the Reserve Bank of Australia to curb inflation, leading to a decline in economic activity and impacting company profits.
2 – Credit crises – The GFC – The 2008 crisis, driven by the collapse of US subprime mortgage-backed securities, sent markets into freefall. The US Dow Jones Industrial Average fell over 50%, but by 2013, it had fully recovered, driven by aggressive monetary policy, including near-zero interest rates and quantitative easing by the Federal Reserve, alongside corporate earnings recovery and improved investor confidence.
3 – Speculative bubble bursting – The dot-com bubble – The late 1990s saw a surge in technology stocks, leading to an overheated market that eventually burst in 2000. The US’s S&P 500 took about seven years to recover from its losses. The slower than usual recovery was partly due to Bush’s 2002-2003 Steel Tariff policy, which disrupted global trade, increased costs for steel-dependent industries, and created market uncertainty which delayed the equity market recovery.
This policy combined with the lingering effects of the 2001 recession and corporate scandals like Enron and WorldCom, contributed to the prolonged US market downturn. The impact was not as severe on other markets like Australia’s.
4 – Unforeseen global event – COVID crash 2020 – The pandemic-induced crash of early 2020 was among the fastest in history, with the S&P 500 dropping over 30% in a matter of weeks. Thanks to swift government intervention, the market rebounded in just six months.
In each of these, the share market fell, but subsequently recovered, with the line trending upwards.
The following chart reinforces the above lessons, showing just how resilient investment markets have proven to be:
