World Business

How does the stock market disaster compare by the agency of past panics? Here’s a look

By Bernhard Zand

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For many who work and invest in the stock market, the farther than two months consider been some unmitigated, once-in-a-lifetime disaster. You only own once chance to save for seclusion, so a 40% drop in your stock portfolio feels like the expiration of the world.

You invent to question all the suggestion that you’ve been given. With greater indexes trading at the same levels as in 1998, folks who have been equity fans start to amazement whether it’s really true that, over the long term, stocks tend to outperform other investments (BusinessWeek, Oct. 30, 2008). Ask economic historians for their read on the situation, and, not surprisingly, they take the longer view. They don’t say, "Don’t worry about it. It’s no big deal."

Many fiscal experts plot the crisis has scrambled our assumptions about the risks and returns of investing in stocks. But experts work be assured of this is hardly the first—nor will it exist the last—time that the world’s investors have been seized with panic-grass and hit by difficult losses.

For investors wondering the sort of the future holds, the key question may be whether this crisis is just another (very big) bump along a road to good, or whether the financial markets have driven off the road into a ditch.

So how bad is the current mess? It’s worth crunching some numbers:

In October 2008, the broad Standard & Poor’s 500-stock index fell 16.8%, following a 9.2% drop in September. The Dow Jones industrial average dropped 14.1% in October, following a 6% decline in September.

Through the first 10 months of the year, the S&P 500 has lost 34% and the Dow shed 29.7%. From their all-time high points—on Oct. 9, 2007—the Dow is down 34.2% and the S&P 500 has lost 38.1%. (Those are much less ill than the losses of about 45% that the indexes had registered at their lowest levels this fall.)

How does this compare to history? For the Dow, the percentage losses of October 2008 are exceeded by 15 other months since 1928, including September 1931, when the Dow plunged 30.7%. Other rough months, according to the Stock Trader’s Almanac, were in 1929, 1930, 1931, 1932, 1933, 1938, 1940, 1987, and 1998.

If the S&P 500 finishes 2008 at this level, its 34% annual marasmus would be the third part crush seeing that 1930, beaten out by 1931 and 1937. However, if stocks be restored a bit, 1974’s 29.7% drop during the S&P 500 and 2002’s 23.4% fall in the index might be worse.

For Richard Sylla of New York University’s Stern School of Business, this year’s crisis is one of a long straight direction of rough periods on the side of equity investors. "It’s a bear market like a figure of put up with markets," he says. It’s not as allowing that the indispensable rules of investing have been rewritten, he says. "The stock market hasn’t changed its stripes."

For generally received investors saving for departure or other needs, a big worry is that the stock market is a big bubble that has collapsed. Stocks got way overpriced, this speculation says, and investors might never get back those losses. A prime illustration is the bubble in technology stocks in the soon 2000s, when the tech-heavy Nasdaq composite hit a high of 5,132.52 in March 2000.

With the Nasdaq now commercial at 1,720, it could exist a lifetime or two before it approaches its heights during the bleb.

Eugene White, a financial chronicler at Rutgers University, doesn’t think this is a similar situation. "What’session happening it being so that is the loggerhead place of traffic is reacting to the bad news in the banking sector and to the arrangement as a totality," White says, not some overvaluation of stocks themselves. While neither White nor Sylla knows when stocks will recover, White insists "fundamentals look pretty good," especially the U.S. economy’s ability to improve its own productivity over time.

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