Understanding the global stock market crash: Aug 2011

Written by: Shoaib Zaman
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Wake-up call for stock investors
Stock markets around the world witnessed a sell-off streak and they all fell (click here to see the fall). Panics and run off happen every few years, and the reason are always the same. A sell-off is usually the start of the vicious cycle of depressing consumer confidence.

As the markets crash due to sell-off, investors' mutual fund and pension funds value erodes. This forces them to control their expenditures. Inevitably their reaction slows down the sales of products which forces business houses to cut back on their investments in plants. They even drop the production level. When this happens, workers are laid-off and media (like us along with everyone else) starts predicting economic doomsday. The cumulative effect is that consumer confidence goes for a complete toss.

The natural question would be - why did this happen?

Well, the answer is not so straight.

Over night, everyone has become more pessimistic with the US market and there is no confidence in EU that it could survive the multiple sovereign default. Though Greece has been saved, the status of Ireland, Portugal and Spain is still critical, now even Italy has found its name to be mentioned in this list.

So is it true? Yes, but why sudden realization?   

This leads to one of the two possible conclusions.

First, someone already has got the data for US unemployment levels, which will be released on Friday in US (Friday night in India), and the figures are pathetic.

The second possibility is that this was an old school run-off based on someone's analysis.

Either way there is humongous problems for ruling politicians all over the world, and also for the Banking heads starting from Federal Reserve to RBI.

In 2008 when global scare and panic had sent stock markets all over the world in distress, the governments of various developed and emerging countries came together and took extra-ordinary measures to restore the faith of the market.

This obviously had its own problem, the fiscal position deteriorated for each of the countries.

(Also read: World"s 10 major countries under debt cloud)

Now with the market confidence again in trouble, who will chip in to restore the confidence is the big question that is remained to be seen.

From an investor perspective, index-funds investors will find the going getting tough and will even be disappointed with the returns. Value investors and Quantum investors too would witness the fall and a fund managers brilliance will be tested as the market react and over-reacts to news and announcements.

GoodReturns.in DISCLAIMER: The views expressed in this article are the views of the author and do not reflect the views of our company.

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