What past market crashes have looked like

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What past market crashes have looked like
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If capitulation is tricky to pinpoint as it arrives, profiting from it is harder still

  • 📰 TheEconomist
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Save time by listening to our audio articles as you multitaskThe biggest downturns, though, have tended to be much more drawn-out affairs. The bloodbath in equities that accompanied the financial crisis of 2007-09 was no single, vertiginous plunge: it played out over 17 months. Talk of the dotcom bubble “bursting” in the early 2000s can obscure the fact that the journey from peak to trough took two and a half years.

Like a bubble, capitulation—investors’ jargon for the final, frenzied phase of a rout—is accompanied by a kind of mania. It is the part of the crash when something snaps in the collective consciousness and everyone who is going to give up and sell does. Perhaps they are retail investors who kept their nerve after losing a third of their capital but, seeing another 20% of value vanish, conclude that it really might go to zero and rush to the exit.

For a more granular picture, consider the rout in March 2020. One lesson from it is that trading volumes spike as the market plummets. Towards the end of the crash, shares in the500 were changing hands at more than double their average rate in the weeks running up to it. Volumes for stocks in Britain’s100 tripled. Another signal is that a large proportion of stocks in an index plunge in value.

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