Markets Natural Response to Crisis

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There have been numerous market crashes in the world. Historically, major crisis have had adverse effects on the market. The impacts vary depending on the specific sectors, lets have a look at the following:

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Geopolitical responses

Eddy Elfenbein analyzed various market’s response to major crisis which were geopolitical in nature. He posits that that the market was at a 4.5% on the initial day it opened after the assassination of JFK and his funeral.  This was in 1963.

In the same light, the Dow Jones closed the year at 17%, even though they were experiencing psychological wounds from that ordeal.

It was noted that the stocks were completely flat within 7 days after the killing of his brother in 1968. The stocks were at 4.5% during the week that Martin Luther King died.

After 9/11 ordeal, the stock market in the US was able to recover after a period of two months.

Hence from the above it can be deduced that the market always falls out after a major crisis. This can be predicted even with the recent Paris attacks.

Globalisation

Globalisation cannot also be left out. It has brought its fair deal of economic crises. Economic crisis are now becoming global in nature. As globalisation is trying to connect people and economies that are far apart, the consequences are not always what was initially expected.  The challenge for policymakers is to try to mitigate its effect– and also to contain their respective impulses to reduce engagement with the rest of the world.

Devaluation of currency

In Europe, the current problems facing the economy can be attributed to them having a common currency. There are numerous ways to deal with each of this problems, however, most countries respond to these crisis politically and the most popular is currency devaluation.

It is a policy that has been used to regain competitiveness, but the trouble is that not all countries can depreciate their currencies in a simultaneous sense. A case in point is the great depression. Governments tried to push the policy but all it ended up doing is making the governments adopt protectionist trade policies. These policies have gone further to constrict growth.

Instability, especially in emerging economies, always leads to a large proportion of wealthy citizens to try and salvage their capital. This always has the effect of increasing real estate prices. This will in effect lead to over-crowding, decline in living standards and difficult commutes by the larger citizenry who cannot afford.

Movement of capital

Another effect of market crises is that as much as it puts capital on flight – it puts people also on flight. When large economies fall, people are driven to seek a better future elsewhere.

Conclusion

Advanced economies are learning to deal with recent downturns at least after the period after the 1930s. However, this is in the economic sense. The social and communal responses have been neglected. Thus a new challenge arises where human suffering is rapidly increasing due to economic and political challenges.

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