3 reasons why you should love stock market crashes
Published by: Lucien Paulemil
April 2, 2022 3:28 am
Investors who fear stock market crashes should realize that they are, in fact, excellent buying opportunities.
Stock market investors often look forward to the month of January.
Historically, January is a month when stock prices rally, due to people investing their end of year bonuses in the markets.
This year, the January Effect worked in reverse: the S&P 500 is down 7% and the Nasdaq is down 12% year to date.
Understandably, many investors get nervous when the markets plunge.
In fact, even seasoned investors with years of market experience fear losing their hard-earned capital when they see the markets crashing. They panic sells their positions and exit the markets waiting for better days.
This is one of the worst stock market strategies you can implement.
In fact, investors should learn to embrace stock market crashes.
Here are 3 reasons why stock market crashes should be welcomed with open arms.
Crashes are a normal phase of the economic cycle
Stock market crashes are common occurrences.
Since the beginning of the 20th Century, the US has experienced 6 major stock market crashes:
1929 Great Depression: the Dow Jones loses 89% of its value.
1987 Black Monday Crash: the markets crash by more than 20%.
1999-2000 Dot-com bubble: the Nasdaq drops by 76%.
2008 Financial Crisis: the Dow drops 54% below its peak.
2020 Coronavirus Pandemic: the S&P 500 and Nasdaq each drop by 30%.
While these numbers are certainly high enough to make anyone’s squirm, they did not signal the beginning of the end of the world.
Quite the contrary: economic theory states that recessions and crashes are simply a normal phase of the business cycle.
In the initial phase, the economy expands and reaches a peak. Then, the economy runs out of steam and contracts, until it reaches a bottom. At that point, the economy starts growing again and soon reaches another peak.
The world economic history is characterized by this repeating cycle. Since the stock market is simply a reflection of the economy, it follows the same cycles.
Despite experiencing numerous corrections and crashes, the US stock markets have been on a steady upwards trend since their inception.
If you zoom out on the charts, you’ll notice that crashes are merely blips on the road to prosperity.
Further, it must be noted that the growth of the US markets is directly linked to the continued expansion of the US economy. If the US economy keeps growing, the markets will naturally grow alongside it.
Should we expect the US economy to continue growing over the next several decades?
The answer is yes.
First, the United Nations expects the world population is expected to reach 9 billion people by 2048. This means more demand for goods and services, which will require more production, which will ultimately result in more economic activity and growth.
Second, it’s good to remember that American companies listed on the US markets are world leaders in almost every imaginable industry. For example, Us-based companies make up 73% of the world’s tech market capitalization and 65% of the world’s healthcare market cap.
As such, they are well positioned to capture a great share of future global economic activity.
Finally, the world is entering the 4th Industrial Revolution, which is characterized by the adoption of intelligent and connected technology, such as Artificial Intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science energy storage and quantum computing.
This revolution has the potential to raise global income levels and improve the quality of life of populations around the world. In fact, most economists agree that technological innovation is a key driver of human growth and well-being.
Thus, the rapid adoption of new technologies will contribute to the world economic growth, which will be captured by the US stock markets.
In March 2020, the US stock markets brutally plunged by 30%.
While many investors were withdrawing their money out of fear, the smart money was acquiring quality assets at discounted prices. In short, they were being greedy while others were fearful, and this strategy paid off handsomely.
Apple is a perfect example of why stock market crashes are lucrative buying opportunities.
In March 2020, Apple’s stock price fell from $81.24 to $57.31, a drop of nearly 30%.
May 29th, 2020: The Bill and Melinda Gates Foundation purchased 501,044 Apple shares in March, when the price was at its pandemic low.
Apple itself spent $20 billion on share buybacks in 2020.
Since hitting its March 2020 lows, Apple’s stock price has skyrocketed 194%, providing shrewd investors with market-crushing returns. In fact, if you had invested $10.000 in March 2020, you would now have $19.400 in your investment account.
Apple stock surged in 2020 and 2021, proving that being aggressive during market downturns is a winning strategy.
From March 2020 until February 11th, 2020, the following stocks surged in price and trounced the S&P 500’s annual return of 28%:
Even Facebook, whose stock price recently plunged by 40%, still generated a total return of 28% since March 2020, equalling the S&P’s return.
But the most impressive total return belongs to Tesla, whose stock price skyrocketed from $85.51 on March 20th, 2020, to $860 as of February 11th, 2022, representing a whopping 911% return in just two years.
The moral of the story
The conclusion of this article is that stock market crashes are nothing to worry about.
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