explain how a stock market crashes
That's an interesting thought Johnjri, and I do agree that high PE of
the S&P suggests an "overpriced" market that might collapse...
unfortunately "high PE" is impossible to define.
The 3 years you suggested looking at have the following peak PE:
1929 32.56
1966 24.05
2000 42.87
And now notice these other years that didn't produce a crash the following year:
1899 23.27
1901 25.23
1995 25.02
1996 27.72
1997 33.03
1998 38.82
1999 44.19
If you had sold (trying to time the market to avoid a crash) during
one of these years you would have missed great profits during the next
year(s). If all I saw was the PE and decided to sell in 1997 for
instance when PE broke over 30 then I would have missed almost
doubling my money in 3 years. Or even worse if I sold in 1995 then I
would have missed trippling my money in 5 years.
There are many factors associated with a stock market crash. Perhaps
the most likely and noticable is a "bubble".
A bubble is when stock prices increase in value faster than would be
expected based on financial/market factors... This increase in value
causes people to begin speculating that they can make loads of money
by buying stock. When these people buy stock it pushes up the prices
even more and so the bubble gets bigger and bigger (the stock prices
rise higher and higher). Then finally at some point more people
decide to sell than buy and the price begins to decrease, and when
this happens people tend to get out of the market quick so many people
sell their stocks within a short amount of time. This causes prices
to plummit... that is the crash.
Sometimes this crash simply brings the price back down to a reasonable
level and sometimes it will take the price even lower. Stock Market Crash Of 2008::
Stock Market Crash Of 2008. By: Market Speculator Tuesday, September 30, 2008 The stock market is simply pricing in a crash of this nations banking system.
http://www.istockanalyst.com/article/viewarticle/articleid/2661870HOME |
Stock Market Crashes History::
The history of the stock market is full of examples of market crashes that had substantial negative consequences on the assets of many investors.
http://www.mutual-funds-advisor.com/mutual-fund-history/strket-crashes-history.htmlHOME |
You might try and find a copy of JK Galbraith's Short History of
Financial Euphoria, which tries to explain some of the underlying
misconceptions about financial markets that lead to speculative
bubbles and stock market crashes.
I'd also like to recommend a book. 'Irrational Exuberence' by Robert Shiller.
I suggest you look at the last column in this table Authored by
Robert Shiller labled "Price Earnings Ratio P/E10":
http://aida.econ.yale.edu/~shiller/data/ie_data.htm
Look in particular at years where the pe ratio is unusually high (ie:
1929, 1966, 2000). Then look at the results that follow the following
years:
http://finance.yahoo.com/q/bc?s=%5EDJI&t=my&l=on&z=m&q=l&c=
-I am not a Google researcher- HowStuffWorks Government Action against a Stock Market Crash::
The cause of the stock market crash could be inflation and a weak dollar. Karen Blumenthal - Six Days in October: The Stock Market Crash of 1929
http://money.howstuffworks.com/government-control-stock-market-crash2.htmHOME |
October Bad Month for Stock Market Crashes - Major Stock Market Crashes ::
The three major stock market crashes occurred in October, but thats probably just a coincidence. Stock Market Crash of 1929 - The History Of US Government
http://stocks.about.com/od/whatmovesthemarket/a/102107crash.htmHOME |
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stock market crashes