Stock Market Crash 2008

Market psychology experts consider in on what is driving the selling hysteria on Wall Street and when to look for investors' moods to change. Are you searching for a way to figure out the 2008 stock market meltdown? Well, you can call it the "Panic of 2008."

In the past century, the world has seen myriad financial crises, economic downturns, and market crashes. But the last major case or scenario to be categorized as a panic was the Panic of 1907.

If ever it were appropriate to revive the term "panic," this is the time. The day-after-day declines in the stock market are unprecedented.

The S&P 500, which is the broad U.S. stock index, has lost more than 20% of its value in six trading sessions from 2nd Oct. to 9th Oct. 9 2008. The Dow Jones Industrial Average (DJIA), which was founded in the late 19th century, had never seen six consecutive daily declines of more than 1% until the memorable month of Oct. 2008.

These chain of events are proving to be beyond normal estimates or expected developments. Falling stock markets would normally take a break from time to time, as the predators or opportunists pounce in to pick up stocks at steal prices. This time, the psychology of the market is anything but normal. Every time the stock market rallies as it did on the morning of the 9th Oct. there are tons of sellers everywhere. Institutional and retail investors alike simply want to get out of the market.

Panic in financial markets, just as in everyday life, can be explained by the "fight-or-flight" tendency. This normally leads people to overreact. Not only are stock traders running and frightened off, so are big financial institutions. You have got panics not only among individual investors but panic in the industry in general. Dysfunction in the credit markets means financial firms lack the trust to transact business with each other.

Is there irrational despair happening then? A panic is a situation in which people do things that oppose rationality. But by that definition, is this really a panic? It is difficult to say people are selling because they are panicking. Selling now is not necessarily irrational afterall. There are lots of good reasons to move from riskier to safer investments at a time when the financial system has ceased working and a serious economic slowdown looks imminent to many economists.

On the other hand, some experts are more convinced that the markets are behaving irrationally. It is not as if we have had a nuclear war and real productive assets were completely annihilated. Rather, problems are in the financial sector, and not in the "real or main activity" in the productive economy. The real non-financial base of the economy, which is the core anyway, is still fairly strong or even far stronger than what happened in the 1929 Great Depression.

Financial panics do not normally last forever. Fact is, eventually, investors will wake up and realize that many assets are trading at heavy discounts. Either we are going to go into a Great Depression, which is unrealistic, or some of these assets are trading at very appealing prices.

Many market participants believe that the wave of stock selling is being driven by hedge funds and other institutions that must sell assets to raise cash. Oftentimes these assets from stocks in solid companies to municipal bonds are being sold without regard to their underlying value. But before jumping back into the market, it is smarter for you to wait for the forced selling to run its course.

So when will the dust settle? Because of our flight-or-flight instincts, things are very quick to crash. But the recovery usually takes much longer. You just need to factor in the fact that current events or adjustments are happening at much faster rate than in the past.

One thing is sure: the market will ultimately reach a bottom. However, no one wants to make the first move. The markets behave in a herd mentality. It can be a concern that governments may simply blame market troubles on panic and irrationality or on people being scared. That gives them the excuse to step in and try to restore market confidence in artificial ways. Good exmaple is the recent ban on short-selling of financial stocks. The real reasons for the financial crisis will take a little longer to fix.

By its very nature, a crisis is a time of uncertainty. It could be months before we know whether markets are crashing because of irrational fear or because of real economic problems. But if we will spend more time to research and have proper perspective and realism, then we should know the reality and not let go of the huge opportunity facing us now and in the next few months.

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