what would happen if the stock market crashed?

[Net Advisorâ„¢]

The answers so far are not exactly correct, nor do they correlate with actual events in history.

Like history, the market tends to repeat itself.

1. What would happen if the stock market crashed?
By generally accepted definition, a "crash" is a drop of 20% or more on major index (such as S&P 500, or DJIA and or NASDAQ 100/ Composite Index ) on a single trading day.

The last time this happened was October 19, 1987.
http://en.wikipedia.org/wiki/Black_Monday_%281987%29

We have had Bear Markets before and after this time including from 2000 to date I would argue, referencing NASDAQ is still down about 51%+ since year 2000 high

Dow was about 13,895 on 07-02-2007, currently about 10,000 as of 08-31-2010 thus down about 28%.
http://finance.yahoo.com/echarts?s=^DJI+...=undefined

NASDAQ was about 4,572.83 in March 2000, currently 2,254 as of 08-31-2010 thus down about 50.71%.
http://finance.yahoo.com/echarts?s=^IXIC...=undefined

What is consistent with all bear Markets is that we have sharp up spikes ("Bear Trap"), and then go lower. This was especially true in the Great Depression, and it remains to be seen if this pattern repeats today or not. I would argue that the possibility exists.

what would happen if the stock market crashed tomorrow?
I don't see the market crashing tomorrow or any time soon. I think the possibility for a break in the S&P 500 is possible then a rally near by the end of October or November if the Republicans take the House and have greater control in the Senate, thus creating grid-lock in government until the next election. This can actually help the market move higher without the interference of some nutty expensive social program costing tax payers billions when we don’t have the money to spend in the first place.

What would it take for the market to Crash?
Right now? A "Black Swan Event" or Series of Events.

A Black Swan Event is en event when something happens that is major and the market had no clue that this event was going to happen, and the impact is so compelling that the market selloff hard.

The rioting in Greece on May 6, 2010 contributed to the end result of the "Flash Crash" in my view.

Flash Crash – Market Panic on 05-06-2010
http://netadvisor.wordpress.com/2010/05/...5-06-2010/

What future event could cause a crash?

1. Nuke goes off fired by Iran or North Korea or major terrorists action involving nuclear event.

2. Major counties in Europe default in close proximity. Greece, Portugal, Hungry, Spain, and a major country such as UK, or France. Not a high probability for UK, France and lesser likely Spain but a possibility. Higher likely Greece, Portugal, Hungry at risk of default. Also add Italy and Ireland to that list.

Not sating this will all happen or happen soon, but the possibility exists and the market does not expect this to happen; thus if it did, it would be a Black Swan Event.

I argued last September 2009 that we are in a "Charlie Brown Recession."

"Economists Said What? Sorry, But The Recession is Not Over"
http://netadvisor.wordpress.com/2009/09/...-not-over/

end notes:
1. one only suffers a capital loss if they sell at a loss. A loss that is not sold is called an "unrealized loss."

2. The stock market did not crash 2 years ago. Individual stocks went bankrupt or near bankrupt, but that does not meet the definition of a crash. We were (are) in a Bear Market and there were several times during 2008 I felt we were 1 step from a Crash, but a Crash never happened.

3. The market may be fairly priced based on historical PE's but if this was the only reason we needed to invest, then the Dow would be soaring.

I would further argue that not all banks are stable. Smaller banks are going under every week. (This series from the follow link is being updated on a new site)
http://netadvisor.wordpress.com/category...l-markets/

Regional banks face rate resets in commercial Mortgages starting in December and add about 2-3 years for that.

Citibank, Bank of America, and Wells Fargo especially still have issues, and I would not argue that they are "stable" now, look stock their stock price. I would further argue some banks will have to recapitalize.
Lead possibility list:

1. C
2. BAC
3. WFC

Markets don't crash just because things are overpriced, or banks fail. Again we have had ONE modern Crash Oct. 1987, and that had nothing to with stock valuation or the banking system.

4. The idea of "a large quantitative easing program" is the closest of the other answers, but the government now claims that they will not have any more bailouts "period." Yea, I don't buy that either.

5. The argument that traders or investors will "lose their shares" does not make any sense. Shares are not lost or become a loss just because of market movements. Again, loss and gains are only realized if one executes a trades resulting in a gain or loss.

Also keep in mind when people lose money (usually from panicking and making poor decisions), there are those who are short the market betting on that fall who are picking up the cash.

Previous related question:
"Will the S&P bounce off the 1040 support level again as it has been doing for the last year or so, or break it?"
http://answers.yahoo.com/question/index;...ekmEDRBGaa

Portions of this post copyright 2010 Net Advisorâ„¢

08.31.2010