Why Did the Market Crash?

It is always discouraging to see the stock market experiencing a crash. When the prices of stocks are going down, investors begin to lose their confidence and sell their shares even to their detriment. This can negatively impact the stock market as a whole, lead to the rise of inflation and even follow the beginning of a new economic recession.

In this article, we will learn about the current situation in the stock market, what caused the recent stock market crash, the possible consequences of the stock market crash and when we can expect it to end.

Key Takeaways

• A stock market crash is a very fast and unexpected decrease of stock prices that usually happens within one day.
• Stock market crashes can precede a prolonged bear market and even follow a major economic recession.
• A stock market crash can be caused by inflation, global economic or political troubles, and even decisions made by separate governments.
• Official reports or releases can help investors predict whether the market is going to collapse any time soon.

What is happening on the stock market now?

The stock market is going through tough times. The previous year was hard on the world’s economy in general, which in turn influenced the current situation across all financial markets. The S&P 500 Index dropped again despite the slow climb up after December’s crash, and the recent collapse of Silicon Valley Bank really caused an uproar in the industry, which means that the current bear market isn’t going to reverse in the near future.

At present, the stock market is experiencing a period of decline as investors start to sell their stocks, fearing that the prices aren’t going to rise any time soon and that they might lose an opportunity to recover their funds.

Why is the stock market down?

In the last couple of years the economy slowed down. Companies no longer make as much money as they used to, which increases uncertainty among investors. They are no longer sure whether the market is going to rebound from a downturn, so they start selling stocks instead of acquiring new ones, which drives the prices lower and scares potential buyers off.

There are multiple reasons that led to the stocks going down, and we’ll try to examine the most prominent of them.

Inflation and increase in interest rates

Just before the start of the new year, the stock market plummeted as the Federal Reserve of the United States announced the increase of interest rates paid on reserve balances to 4.4% in an attempt to battle the raging inflation. This is a common practice that aims to reduce the amount of money in circulation and lower economic activity of the population, reducing inflation rate as a result.

However, high interest rates are usually bad news for the stock market. When the interest rate goes up, it becomes more expensive for companies to take loans and do business. Less business means less revenue and earnings, which stalls the growth of a company. It no longer seems attractive to investors, so they usually try to get rid of the stocks they own and move their capital into more stable investments. As a result, the stock market continues its descent without new monetary input from traders.

Disparity between supply and demand

This factor is partially connected to the increase of inflation rates. As we know, supply and demand are tightly connected to each other. High demand for goods encourages higher supply and raises the price of these goods. So with investors selling their stocks, the supply of the stocks begins to rise. However, the current financial hardships cause potential buyers to be wary of purchasing the stocks. This means that while the supply is high, the demand for stocks is quite low. This disparity causes the prices of stocks to decrease. But since the present circumstances affect the majority of companies on the market, this disconnect between supply and demand has spread across the stock market as a whole.

Influence of the global markets

The recent pandemic demonstrated how globalization has connected the economies of all countries. COVID-19 and the measures adopted to prevent it from spreading cut off a lot of supply chains around the world. Even now, when most countries have almost recovered from the pandemic, we can see how the restrictive quarantine measures in China caused the shortage of resources needed to produce new goods and affect the productivity and profitability of many companies worldwide. This illustrates how the trends and issues that prevail in one global market tend to affect the state of all other global markets across the world, spreading around like a chain reaction.

Geopolitical events

The stability of the stock market can be affected even by the events that don’t have anything to do with finances directly. International and internal conflicts, natural disasters, a radical change of government and other unforeseen circumstances can influence a company’s ability to provide goods or services, which can affect its earnings and standing on the stock market. So when these events strike several countries at the same time, the damage to the global stock market is imminent.

Collapse of important financial institutions

The recent debacle of Silicon Valley Bank caused a large wave of panic to ripple throughout different markets. SVB was the second largest bank in California with a capital of $200 billion, so its collapse became the second largest bank failure in US history. Its former involvement in the venture capital and startups sector means that a lot of startups are likely going to suffer from the collapse of the bank, with some companies having to close down in the near future. What’s more, the S&P 500 showed the largest weekly decline since the beginning of 2023. This is a great example of how much banks and other financial institutions can influence the stability of the stock market.

Dangers of the stock market crash

When the stock market experiences an unexpected drop in prices, it can scare investors from buying new stocks. They try to get rid of what they consider unreliable investments. But stocks are a very important source of monetary support for companies, and without enough investors their business may slow down. Companies might have to cut off a lot of expenses and lay off a number of workers, which in turn raises the overall unemployment rate. People who no longer have jobs tend to spend less money, and this causes the revenue of the companies to drop even more. This endless cycle may eventually lead to a decline in the economy and even cause a new economic recession, which already happened in the past. This is why the stock market crashes often cause panic among the general public.

When will the stock market crash end?

With the market down, you might feel like this downturn will never end. However, this is not the first time the global stock markets have experienced such a dramatic crash. What a lot of traders forget about is that the stock market always moves in cycles. A bearish market, with its falling prices and negative investor sentiment, is always followed by a bullish market, which always lasts much longer.

It might take a while for the prices to climb back up, but it will happen eventually. The best way to find out when it is likely to happen is to follow the official reports, monetary policy decisions made by central banks and economic releases.

For example, the Nonfarm Payrolls (NFP) report provides information about the current situation on the labor market in the USA. The investors pay close attention to this report as it can indicate whether the stock prices are likely to rise or fall. If the NFP report shows a strong job growth, this is a sign of a strong economy, while weak job growth or high unemployment can indicate that the economy is struggling and there might soon be problems on the stock market.

A Consumer Price Index (CPI) is another indicator that can prove helpful for investors. It is used to measure the rate of inflation. If the CPI indicates that inflation is getting dangerously high, the government may raise the interest rates, which can lead to decrease in stock prices, as we’ve recently seen happen in the USA.

There are many other reports and releases that can show you the bigger picture. Follow the economic releases and be ahead of the market with the FBS economic calendar. This will allow you to see if there is a chance for the stock market to crash or climb back up, and prepare accordingly.

Based on the data mentioned above, the Federal Reserve (the US central bank) and other regulators make their decisions on changing the interest rate. If the inflation peaks and the officials are sure it will go down soon, the Fed cuts the interest rate, weakening the US Dollar and pushing the stocks up.

Conclusion

This decade had quite a rough start, with one stock market crash following another within a relatively short period of time. It is quite hard to say how soon the bearish trend on the stock market will be replaced by an upwards price movement. The only thing investors and traders can do at the moment is wait for more official releases and avoid making rash decisions out of fear.

FAQ

Why do stocks go up?

The price of stocks goes up when a large number of traders want to buy them. The higher the demand for a stock is, the lower the supply gets, which means the remaining stocks get more expensive for the buyers to acquire.

What is going on with the stock market?

Currently, the stock market is moving down. The reason behind this is high inflation, geopolitical events, and the recent increase in interest rates that made taking loans more expensive.

Why is the market going down?

The market goes down when the demand for the securities decreases. A prolonged bear market occurs when the economy is experiencing hardships that cause investors to lose their confidence and sell the stocks they have in possession.