IMPORTANT ANNOUNCEMENT: MyWalletHero is becoming The Motley Fool UK - click here to read more about our name change.

The different types of stock market crashes (and what they mean for the future)

The different types of stock market crashes (and what they mean for the future)
Image source: Getty Images.


What have we seen so far that is different to other types of stock market crash? How will these factors impact the economy in the long run?

I’ll focus on present-day factors that have affected the market differently compared to previous stock market crashes. We are all trying to find the answers, stay ahead of the curve and achieve growth in our portfolios. But as we are dealing with something nobody has ever seen before, does anybody know what’s coming next…?

Politicians

The type of stock market crash that happened earlier this year has been more heavily influenced by politics than any previous market crash. It is not unreasonable to believe the political reaction to the virus has been the primary cause of the crash. The world has never been placed in lockdown before and it came about faster than any business could react to. There has been an apparent race amongst leaders to be the first to lock down their countries. Actions that were unthinkable one day have quickly rooted themselves into reality the next, regardless of the economic fallout involved.

The heavy-handed handling of communication, between governments and towards the general public, has knocked confidence in traders and amateur investors alike. This includes the looming threat of imposing another lockdown if things do not go to plan.

It has to be asked whether businesses are able to cope with this, particularly in front-line fields such as tourism where the EU and member states have held disagreements over lockdown restrictions. This is a type of stock market crash that has been aggravated by a lack of direction. I believe this is down to simply not knowing the truth behind coronavirus and its lingering impacts.

The Black Swan

Coronavirus is the new known unknown. After months of turmoil and testing, it is no clearer how long it will be around for, how quickly an effective vaccine can be created and what the best way to deal with it is. Uncertainty has indeed featured in previous types of stock market crashes; however, it has never originated from a virus before.

Our last stock market crash occurred when the banking sector lost their moral compass in 2008. Promoting elaborate, irresponsible lending – often to the most vulnerable people.  Since then, governments have imposed regulatory powers to ensure full capitalisation of banks with the liquidity to move stock markets in the right direction. The country was looking forward to a new period of growth after the Brexit stalemate.  Where similarities differ with 2008 is that the fundamental problem in the financial system that existed previously isn’t relevant today as this crash stems from the sudden difficulty for people to spend their money.

Social media and instant messaging has grown dramatically since the 2008 crash. Never before has there been a flow of information that’s as capable to reach the far corners of the world. Hence, scare stories, hysteria, irrational comments and fake news can be projected across the globe. These stresses have found their way into working life; there has never been such liability in business to please workers whilst being able to turn a profit. Financial losses and new barriers to entry will naturally steer employers away from the risk of business ownership as this type of stock market crash has left so many different groups of people uncertain of their next steps.

So, how does our future look?

Some things that have recently been introduced to our way of life; social distancing, working from home and a general feeling of unsteadiness when in crowded places could very well be here to stay. These persistent after-effects from this type of stock market crash drastically affect businesses of all shapes and sizes. One example of the new normal given by Heathrow boss John Holland-Kaye is a 1km queue for each jumbo jet. For the economy to begin its long journey of recovery and to avoid a proclaimed ‘mega-recession’, sustainable measures must be introduced to move forward confidently.

This type of stock market crash has produced spiralling complications that did not exist prior to the lockdown. For decades, we have not looked up to our leaders with such expectation for guidance. Likewise, throughout history leaders have not been stumped by an economic problem quite like this. However, I believe with the prioritisation of employment in the country and a long-term investment mind-set, instability in our economy will even out and we will recover from this stock market crash.

Rated 5 stars out of 5 by The Motley Fool UK

Trade UK shares for just £2.95 and US shares for just $3.95 — with no platform fee!

The FinecoBank* Multi-Currency Trading Account offers UK investors highly competitive share-dealing rates across 26 global markets. Open your account using promo code TRD500-ML and during your first 3 months you can trade without incurring commission charges – up to a total commission amount of £500. (Terms and conditions apply.)

*Affiliate Partner. Important information and risk disclaimer: The value of shares and any income produced can fall as well as rise, and you may get back less than you invest. Exchange rate fluctuations can reduce the sterling value of any overseas holdings.

Was this article helpful?
YesNo

Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.