The first six months of 2022 might not have looked the most promising for investing in the stock market and have left many investors worried. However, it is important to remember that all hope has not been lost, and there is a silver lining we must notice.
Geopolitical and economic factors like the Ukraine-Russia war, aggressive interest rate hikes in the US, and high inflation rates have disrupted the market. As a result of these factors, panic selling, economic bubbles, and speculation amongst buyers and investors have caused stock market dips.
History has taught us that stock market crashes tend to occur amid the fallout of an economic crisis or due to major catastrophic events. Let’s look at some significant past market crashes and how the market has performed following the crash. This history lesson will serve as a guiding light for investors today.
Sept 2001 after the 9/11 attack
On September 11, 2001, the opening of the New York Stock Exchange (NYSE) was delayed following the first plane crash, and trading for the day was canceled after the second plane crashed into the World Trade Center’s North and South Towers, respectively. NASDAQ also canceled trading, and stock exchanges across the globe were closed for fear of further terrorist attacks. The NYSE remained closed until the following Monday.
Currency trading continued resulting in the United States dollar falling drastically against the British pound, Euro, and the Japanese Yen. The European stock markets and several other global stock markets also plunged to new lows. The first week of trading following the 9/11 attacks saw the S&P fall by more than 14%, whereas gold and oil prices spiked upwards.
However, as you can see from the graph below, the Dow Jones Industrial Average dropped once more following a brief spike following the 9/11 attacks and then continued to gradually recover from the drastic plunge that it endured as a result of the attacks.
Lehman bros 2009
The Federal National Mortgage Association (also known as the FNMA or Fannie Mae) attempted to make home loans more accessible to citizens in the United States, who had low credit ratings and less money to spend on down payments than what was typically required by lenders.
This led to the rise of subprime buyers, who were offered mortgages with payment terms like high-interest rates and variable payment schedules. This led to explosive growth in mortgage originations and home sales. Companies used this opportunity to capitalize on the surging housing economy by heavily indebting themselves.
The Lehman Brothers were one of the first firms on Wall Street to move into the mortgage business. By 2008, Lehman had transformed into a real estate hedge fund disguised as an investment banking firm. They had assets worth $680 billion but only $22.5 billion of firm capital. Lehman Brothers flourished by borrowing significant amounts to fund its investing, in a process known as leveraging or gearing.
In 2008, Lehman faced unprecedented losses due to the continuing subprime mortgage crisis. They had to file for