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U.S. stock apocalypse: 7 crashes in 30 years

  From 1990 to the present, there have been 7 major drawdowns in U.S. stocks (at least one of the three major U.S. stock indexes fell close to or more than 20%), in 1998, 2000-2002, 2007-2009, and 2011. , 2018, 2020 and from the end of 2021 to present.
  Among them, the 2000-2002 Internet bubble, 2007-2009 subprime mortgage crisis and the outbreak of the new crown epidemic in 2020 have three large drawdowns, and the three major stock indexes have all drawn back more than 30%; while the 1998 Asian financial crisis and the Russian financial crisis , the 2011 European debt crisis and the 2018 Fed rate hike in the three major stock indexes have mixed performances. Currently in the midst of its seventh major drawdown since 1990, the Nasdaq has drawn back more than 20%.
  There are two main reasons for the seven major drawdowns of U.S. stocks in the past 30 years: risk events and tight monetary policy. Major risk events may cause economic expectations to be affected and panic selling in the market, resulting in a larger drop in the index. For example, the panic selling in the market after the outbreak of the new crown epidemic in 2020 caused the stock market to plummet. In addition, liquidity changes caused by tightening monetary policy are also an important reason for the stock market’s pullback. Tight monetary policy can cause valuations to fall and stock index adjustments. For example, the Fed’s interest rate hike in 2018 led to a large pullback in U.S. stocks.
  The interest rate hike will adjust the U.S. stock index in the short term, but the U.S. stock market will rise more and fall less during the whole cycle of the interest rate hike. In the past four rounds of Fed rate hike cycles, the three major U.S. stock indexes are likely to adjust 30 days and 90 days after the first rate hike. There is a rise, and as time goes on, the impact of interest rate hikes on the stock index trend has weakened.
The first time: the Asian financial crisis and the Russian financial crisis

  In the 1990s, the financial system of emerging Asian markets was relatively fragile. On July 2, 1997, Thailand announced that it would abandon the fixed exchange rate system, and the implementation of the floating exchange rate system caused the fluctuation of the Thai baht. From this as a starting point, the Philippine peso, Indonesian rupiah, ringgit, Singapore dollar They became the target of international speculators’ attacks one after another, causing the financial turmoil in Southeast Asia. Then the impact extended to the new Taiwan dollar in Taiwan, Hong Kong dollar and the Korean won in Hong Kong, China, and the crisis spread throughout Asia. At the beginning of 1998, the financial turmoil in Indonesia resumed, and Indonesia fell into a political and economic crisis. Affected by it, the Philippine peso, ringgit, Singapore dollar, and Thai baht fell one after another. At the same time, the exchange rate of the Japanese yen depreciated sharply, causing turmoil in the western foreign exchange market. The Asian financial crisis continued to deepen and caused U.S. stocks tumbled.
  At the beginning of August 1998, international speculators launched a new round of attacks on Hong Kong. The Hong Kong SAR government responded, and international speculators lost in Hong Kong.
  Since independence, the Russian economy has been on the verge of turmoil and recession, and the financial sector cannot make ends meet. In order to solve the financial difficulties of the country, the Russian government has to issue a large number of short-term bonds and external borrowings. On August 17, 1998, the Russian government devalued the ruble, defaulted on its national debt, and announced the suspension of repayments to foreign creditors, causing another shock in the US stock market. Before this big pullback, the fundamentals of the U.S. economy remained stable as a whole, the target federal funds rate remained at 5.5%, and liquidity remained stable.
The second time: the bursting of the Internet bubble

  At the end of the last century, the rapid development of Internet technology in the United States, under the policy of the US government to cut interest rates and taxes, intensified the bubble of US technology stocks, and the Nasdaq index reached an all-time high in March 2000. Previously, in order to prevent the risks brought by the Russian debt default event in 1998, the Federal Reserve cut interest rates three times in a row from September to November 1998. After the crisis was lifted, the Federal Reserve raised interest rates several times since June 1999. The target federal funds rate was raised from 4.75% before the interest rate hike in June 1999 to 6.5% in May 2000.
  At the same time, on March 20, 2000, the financial magazine “Barron’s” published an article called “Burning Up”, which revealed the poor status quo of Internet companies, which became the fuse and burst the bubble of Internet technology stocks in the United States. Investors have been dumping internet tech stocks. Influenced by events such as the “9.11” terrorist attack in 2001, the stock index fell for two years. During this great pullback, the U.S. economy experienced a downturn. For example, in the first quarter of 2000, the U.S. GDP growth rate was 4.23% year-on-year, but in the fourth quarter of 2001, the U.S. GDP year-on-year growth rate fell to 0.17%.
The third time: the subprime mortgage crisis

  Due to the financial crisis caused by the bursting of the Internet bubble in 2000, from May 2000 to June 2003, the federal funds target rate was reduced from 6.5% to 1%, and the loose monetary policy side promoted the formation of the real estate bubble. From June 2003 to June 2006, the federal funds target rate rose from 1% to about 5.25%, liquidity tightened, and the default risk of low-credit people rose sharply, causing the subprime mortgage crisis. In April 2007, the second largest in the United States New Century Financial Corporation, a subprime mortgage company, went bankrupt.
  Because Fannie Mae and Freddie Mac, the two major real estate companies in the United States, packaged and sold subprime loans through asset securitization, the crisis spread to the financial market, and began to affect ordinary credit not related to real estate, and then affected those related to mortgages. Lending to large financial institutions that are not directly related, triggering liquidity risks and recessions. In the third quarter of 2007, the US GDP increased by 2.4% year-on-year, and in the first quarter of 2009, the year-on-year GDP growth was only -3.28%.
Fourth time: European debt crisis

  In 2011, the European debt crisis continued to spread, from Greece at the beginning to Italy, Spain and other countries, and the borrowing costs of some countries in the euro area soared. At the same time, the US national debt crisis is also fermenting: on January 6, 2011, the US Treasury Department said that the size of the US debt will reach the debt ceiling in the near future. If the ceiling is not raised, the government may default on its debt. By May 16, 2011, U.S. debt reached the legal limit of $14.29 trillion. In order to avoid default, some government agencies were forced to stop work and some project budgets were cut. From July 25 to July 30, 2011, the US bipartisan proposals for raising the debt ceiling were rejected one after another, and the three major US stock indexes fell one after another. Although the Senate and the House of Representatives passed the bill to cut government spending and raise the debt ceiling on August 1, the U.S. stock market continued to fall sharply until October due to the government’s commitment to reduce the deficit and the market worried that the reduced fiscal spending would lead to insufficient momentum for the U.S. economic recovery. end.
  During the great pullback in 2011, the U.S. economy experienced a decline. In the first quarter of 2011, the year-on-year GDP growth rate was 2.03%, and in the third quarter of 2011, the year-on-year GDP growth rate dropped to 0.92%. In terms of liquidity, the federal funds target rate remains at a low level of 0.25%.
Fifth time: The crunch of liquidity in 2018

  The main reason for the decline in the US stock market this time is the liquidity crunch.
  The specific background is as follows: (1) The fundamentals of the U.S. economy remained strong in 2018. For example, the unemployment rate in March, June, September, and December of 2018 was 4%, 4%, 3.7%, and 3.9%, respectively. 10-year low. In order to prevent the economy from overheating and keep inflation at a reasonable level, the Federal Reserve raised interest rates four times in 2018. The federal funds target rate rose from 1.75% in March to 2.5% in December, and market liquidity was tightened. U.S. stocks adjusted. (2) The Trump administration’s “trade friction” and other policies have affected the risk appetite of the US stock market and corporate profits, causing the market to worry about subsequent economic growth. (3) Before the U.S. stock market fell sharply in 2018, the valuation of U.S. stocks was at a historically high level. For example, on August 1, 2018, the Dow Jones Industrial Average, the Nasdaq Index, and the S&P 500 Index were in the price-earnings ratio history of the past five years. The quantile is 89.20%, 92.22%, 66.80%, and the valuation level is relatively high.
The sixth time: the outbreak of the new crown epidemic

  With the outbreak of the new crown pneumonia in 2020, the number of confirmed cases of the new crown around the world has gradually increased, and U.S. stocks have fallen sharply due to fears of an economic recession. From February to March 2020, the maximum drawdowns of the Dow Jones Industrial Average, the Nasdaq Index, and the S&P 500 reached 37.09%, 30.12%, and 33.93%, respectively. In order to boost market confidence, the Fed cut interest rates by 50bps and 100bps on March 3 and March 15, respectively. Since then, it has injected funds into the market through quantitative easing and other means to alleviate problems such as tight liquidity. In addition, the United States successively introduced bills such as the “Coronavirus Preparedness and Response Supplementary Appropriation Act” and the “Coronavirus Aid, Relief and Economic Security Act” in March to avoid an economic downturn. In the end, U.S. stocks stopped falling and rebounded. From March 23 to June 23, 2020, the Dow Jones Industrial Average, Nasdaq Index, and S&P 500 Index rose by 36.41%, 47.27%, and 35.85%, respectively, basically filling this round decline.
Seventh time: Nasdaq has pulled back more than 20%

  From the end of 2021, U.S. stocks have experienced a large drawdown. From November 19, 2021 to May 9, 2022, Nasdaq fell by 27.61%. The reasons for the larger adjustment are: (1) Currently, the unemployment rate in the United States is low, but inflation is at a historically high level. Therefore, the Fed will raise interest rates and shrink its balance sheet to curb inflation, and the market expects that liquidity will weaken. (2) In terms of fundamentals, due to the base effect, the year-on-year growth rate of GDP will be relatively large in 2021, and there will be greater downward pressure in 2022. (3) The Russian-Ukrainian war has not yet ended, and prices of energy and food will be raised in the short term, pushing up the risk of global stagflation; (4) The epidemic in China since March and April has had a certain impact on the recovery of the US supply chain and economic growth . (5) The performance of some US stock Internet and technology giants is under pressure.
  Compared with the larger pullbacks in the past six U.S. stocks, the reasons for this pullback are more comprehensive. On the one hand, this retracement is due to the impact of the global new crown epidemic, the outbreak of the Russian-Ukrainian conflict, etc., the global supply chain and prices have been disturbed, and the market’s expectations for the U.S. economy have changed, which will affect the stock market trend; on the other hand, U.S. inflation will rise in 2022. To the highest level in 40 years, the Fed’s tightening monetary policy in response to inflation has strengthened market expectations for a U.S. recession caused by a liquidity contraction, while the Nasdaq has retreated more than the Dow and S&P 500 due to The Nasdaq, which contains many technology growth stocks, is more sensitive to changes in interest rates.

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