Trader Insight
While no two crashes are alike, most share common themes. They are often triggered by excessive leverage and unchecked speculation, which lead to overvaluation. Inflation and policy uncertainty also exacerbate volatility and make markets more vulnerable to sudden sell-offs. High inflation can erode the purchasing power of money, making it more expensive to buy goods and services. It can also trigger higher interest rates, squeezing profits for companies and consumers and dampen investor enthusiasm. This can amplify stock market declines, as investors fear lower post-tax returns. Policy surprises, like the shortest-lived UK prime minister’s 2022 budget shock which saw huge unfunded tax cuts, can send markets into a tailspin.
When a crisis hits, traders become fearful and start to liquidate positions. Trader Insight: Algorithmic and high-frequency trading magnifies volatile movements, and automated stop-loss triggers can speed up the selling. This can trigger panic sell-offs, which can spiral out of control and lead to a crash.
Globalisation has increased the frequency of financial crises, from Latin America’s debt crisis in the 1980s to the Asian currency crises and US dotcom stock market collapse in the early 2000s. Even now, a sudden loss of confidence could see markets plunge if trade tensions escalate. But understanding the causes of past market crashes can help traders recognise patterns, anticipate risk and stay grounded during periods of turbulence.