Today’s markets have sophisticated safeguards against crashes, such as circuit breakers that automatically pause trading when stocks fall too far. But despite these speed bumps, global markets are still susceptible to the shock of unexpected market stresses. These stresses can often be traced back to a combination of economic factors, geopolitical tensions, or inflationary pressures. What’s more, market downturns rarely have one trigger; they’re usually a result of multiple vulnerabilities exposed by a single event.
While there are no guarantees, understanding what causes market crashes can help investors maintain perspective during volatile times. The most common cause of market turbulence is structural uncertainty. When a country’s economy experiences a slowdown, people are left wondering how long it will take for working practices and social norms to return to pre-Covid levels. The threat of a global trade war also rattles markets.
Investor enthusiasm for tech firms sent valuations soaring, but many of these companies weren’t profitable, resulting in a collapse in stock prices when reality caught up.