This paper utilizes data on subjective probabilities to study the impact of the stock market crash of 2008 on households’ expectations about the returns on the stock market index. To put my money where my mouth was, I recently purchased ~$2000 in call options expiring April of 2016 on an ETF tracking the U.S. financial sector. For Carla Due (right below), the stock market crash had a very personal impact She had just emigrated to Nebraska from Denmark a few months before the crash. While the Fed made a token raise in interest rates half a year ago, it has not been able to raise them again in over half a year because doing so would probably trigger another stock market crash in 2016 like we saw at the start of the year.
Even though Britain is the world’s fifth-largest economy, that still could not account for the knee-jerk sell-off in the United States and Japan, whose stock markets are still very much domestic-driven. The Stock Market Crash of 1929 kicked off the Great Depression Over four days, share prices fell 25%. While the risk of a stock market crash may be higher, it may not matter for long-term investors.
This is the true definition of idol worship and the root of original sin as put forth by the serpent in the garden; you shall become like God”. Lower risk means lower returns but also less chance those returns are going to disappear in the next stock market crash. At the same time, average uncertainty increased, perhaps as the result of increased stock market volatility. Understanding your risk tolerance, and then investing accordingly, is the first step to finding balance and not really worrying about the next stock market crash. He figures stimulus measures have run their course and the bull market has finally exhausted itself.
The Fall of 2008 also witnessed the run-up to the Presidential election on November 4th, which focused many people’s attention towards economic issues, but it also led to a natural uncertainty about future economic policy. The effects are found to be largest among stockholders, those who follow the stock market and those with higher than average cognitive capacity. It seems clear that we should not assume gold will fall in a stock market crash… just the opposite has occurred more often. Many Americans speculated in the stock market, often with large amounts of borrowed money, and became extraordinarily wealthy. In other words the advantage of owning such stock was solely that its price would continue to rise.
Smithers backs up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. They noted that both collapses followed attempts by the Fed to counter speculation by the use of restrictive monetary policy and wondered if the latest crash would be followed by a new Great Depression. By 1932, the index of stock prices had fallen from a 1929 high of 210 to a low of 30. Stocks were valued at just 12 percent of what they had been worth in September 1929.