What History Can Teach Us About Market Cycles When Investing

What History Can Teach Us About Market Cycles When Investing

2020 was a pretty eventful year to say the least. The pandemic and following lockdowns around the world had a massive impact on life in general, which resulted in affected stock markets and investment portfolios. The volatility that stock markets experienced a year ago is bound to be fresh in the mind of investors, but the crash certainly wasn’t unique.

For Centuries Investors Have Experienced Ups And Down

Technology has made investing much easier than ever and gives investors a far greater choice, but the fundamentals have been around for centuries.

The modern investment structure can trace its direct roots back to the 15th century. The Amsterdam Stock Exchange, which first opened in 1602, is often labelled as the first stock market, however there is evidence that shows investing happened before this. The Code of Hammurabi, which dates around 1700bc, provides some legal ideology for investing.

Despite opening more than 400 years ago, the basics of the Amsterdam Stock Exchange in the 1600s work with the same principles as stock markets today – by connecting potential investors with real investment opportunities, and investors with businesses for capital injections. It was first set up by the Dutch East India Company to issue its shares.

Some of the biggest stock markets today go back hundreds of years. The London Stock Exchange was first founded in 1801, and the New York Stock Exchange just before that in 1792. To make it even easier for investors and the public to keep track of performance, stock indexes were formed. Some go nearly as far back as the stock exchanges themselves. Both the Dow Jones and Standard & Poor’s (S&P), for example, are over 150 years old.

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Over such a lengthy history, there has been inevitable ups and downs for companies and investors alike.

What Causes Stock Markets To Crash?

A stock market crash is a fast drop in stock prices, and tends to be unexpected. A glance back shows a wide range of reasons for stock market crashes, from investor panic to economic disaster. Here are a couple of examples of significant stock market crashes:

Tulip Mania Bubble, 1637

It is hard to imagine tulips playing a headline role in a stock market crash, however that’s what happened in the Netherlands back in 1637. When the contracted prices of some fashionable tulip bulbs reached crazy high levels, a disastrous collapse followed shortly after. It is quite often viewed as the very first speculative bubble. While it had little impact on the strong Dutch economy, it did affect commerce and some investors.

Wall Street Crash of 1929

This particular stock market crash had wide-reaching implications, leading to the US Great Depression. It lasted for over 4 years after a speculative bubble burst because people were borrowing money to invest back in to shares. As these loans began to be called in, investors started to sell. On 29th October 1929, dubbed ‘Black Tuesday’, investors sold over 16 million stock market shares in Wall Street, causing the economy to collapse, putting an instant end to the prosperous economy of the “Roaring Twenties”.

Dot-Com Bubble, 2000

Technology is an integral part of everyday life today, but there was still excessive speculation of internet-based companies back in the 90s. With internet use increasing, investors started to invest more of their money in technology based businesses, which lead to a bubble. At the beginning of the new millennium, a lot of online companies failed and as a result, shares in blue-chip tech-companies suffered.

The Financial Crisis of 2007/08

Still fresh in the minds of many an investor, the failure of large financial institutions due to high interest loans, which tend to be used by borrowers with a greater chance of defaulting, all led to the financial crisis of 07/08. It started in the US and quickly became a full on global crisis, with many banks failing in Europe. Not only did it adversely affect the stock market, but it had a significant impact on the entire global economy.

The 2020 stock market crash might seem unique in the circumstances that led to it, however that couldn’t be further from the truth. Many unexpected events have had a direct affect on stock markets for centuries.