Following some gut-wrenching volatility in August, last year, the Shangai Stock Exchange gathered its momentum towards the end of the month. The turbulence in the Chinese Stock market that had a ripple effect, globally, has eased for now. They have also bounced back nicely off the past few months’ year-lows.
A similar crash in the markets of China, being the 2nd largest economy in the world, can have unimaginable bearings in other economies of the world in the coming years. As markets have settled down, the debate as to whether we’re in the early stages of a full-on economy crash has quieted.
No reason to get comfortable
However, there are no reasons to get comfortable now. It is still an open question. In times like these, it’s advantageous to get a historical perspective. It is important to understand there is always silence before the storms. In other words, whoever is concerned about a market crash, shouldn’t take comfort in the market’s recent stabilization. Market breakdowns take time.
Naturally, after August 2015’s market’s recovery, investors believe this phase to be a “buying opportunity” that is, supposedly, the initiation of another surge to record highs. However, it can possibly also be one of those classic bear-market rallies that have punctuated almost every major market crash in history.
Market crashes of 1987, 2000 and 2008
In retrospect, statistics demonstrate how the last three major market crashes of 1987, 2000 and 2008 were preceded by preliminary drops of 10% to 15% followed by sharp rebounds like the ones we have been experiencing right now. These rallies were in fact seemingly comfortable and encouraging at that time. Just about when most of the shareholders had decided it was safe enough to get back in the water, the real crash began.
A bear market rally is basically an investment phenomenon, a period in which the prices of stocks increase during a bear market. It is generally a temporary, short-lived market increase following a period of market decline and is followed by yet another period of market decline leading to a final prominent and pronounced down trend.
If you carefully observe the details, in August 1987, stocks peaked and were then immediately sold off sharply. A bear market rally had begun around that time, which by early October, had recuperated almost all of the losses. As all bear market rallies usually are, even this was presumably quite comforting to traders back then.
A kick in the teeth
What happened next is something that came as a kick in the teeth to them. The stock prices fell drastically and the crash was remarkable this time. Similarly the “bubble of 1990s” had hit its highest point in the spring of 2000. After this the markets had declined considerably, though there was period of brief recovery in the summer months up till August.
By fall, all of the lost ground had been regained and the investors were sighing in relief only to learn that the transitory period in their favour was momentary. The 18 months thereafter were disastrous.
The great Recession of 2008-09
Likewise in the years leading up to ‘The great Recession of 2008-09’ were indeed very good ones for the market. Stocks were being sold off sharply in July, but then the market regained its balance and stock prices surged to new highs. They were however sold off even more sharply by mid-October.
In March of 2008, however, with everyone being assured that sub-prime debt problems were “contained,” stocks began to rally again. By June, they had progressed all over again after which they directly fell off a cliff. Mr. John Hussmann, an expert and analyst in stock market very rightly mentioned that these recent stock market actions actually look similar to the aforementioned actions that had preceded the three most recent crashes.