Historically, crashes tend to follow a recognizable pattern. Investors can use this knowledge to prepare for them and reduce the impact on their portfolios.
A global market crash can be triggered by many factors. Some are more likely to lead to a crash than others, but all can cause a dramatic sell-off in stocks. A major catalyst may be the failure of a large financial firm or a sudden drop in interest rates, for example. Other common triggers include political events, economic uncertainty or a sudden spike in volatility.
The global market crash of 2020 was sparked by a combination of reasons. The coronavirus pandemic drove investors to seek safer assets, and rising geopolitical tensions heightened fears of war. The collapse in the market accelerated as China announced retaliatory tariffs, and technology stocks like Apple and Nvidia suffered along with defense firms like Lockheed Martin.
Crash catalysts can vary, but the most important factor is investor psychology. Panic selling often exacerbates the decline, leading to a cascade of sell orders that causes prices to plunge. Despite this, most stock markets eventually recover and rebound. Regulations, circuit breakers and central bank interventions have reduced the severity of market crashes, but they haven’t eliminated them altogether. Understanding this history can help investors maintain perspective during volatile times and recognize that investing through a crash typically pays off in the long run.