For everyone who has been holding their breath while watching stocks in 2021—just hoping the rug won’t be pulled out from under them—July 19 sure wasn’t their day. That’s when the stock market took its biggest hit of the year, with the Dow Jones falling 2.1%, the S&P 500 dropping 1.6%, and the Nasdaq tumbling 1.1%.1Look, it’s good to be in the know about what’s going on, but at the end of the day, worrying will only cause harm, not good.
Oh, and for the record—by the end of the week, the market had recovered.2
So, will we see the stock market crash during the rest of 2021? Let’s take a look at some of the major factors (with a cool, level head) to better understand where the market is going.
What Is a Stock Market Crash?
A stock market crash is a sudden and big drop in the value of stocks, which causes investors to sell their shares quickly. When the value of stocks goes down, so does their price—and the end result is that people could lose a lot of the money they invested.
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To get an overall idea of the value of stocks, we look at indexes (that’s something that tracks how well stocks do) like the Dow Jones Industrial Average (DJIA), the S&P 500 and the Nasdaq. If you look at a visual graph of one of these indexes, you can see why we use the term crash. It’s like watching a plane take a nose dive.
Previous Stock Market Crashes: Examples From History
Throughout history, the market has gone through a lot of extreme ups and downs. When we look back, we’re reminded that, yes, a market crash is a very difficult thing to go through, but it’s something we can and will overcome.
- The Great Depression, 1929: Over the course of a few days, the DJIA dropped nearly 25%.3 It took a little over a decade for the economy to get back to predepression levels. It was the industry from World War II that helped get things back up and running.
- The Stock Market Crash, 1987: The market lost 22.6% of its value in one day known as Black Monday.4 But within two years, it had recovered everything it had lost.5
- September 11, 2001: Terrorist attacks in our country caused a major hit on the market, but it corrected itself super quick. Just one month later, the stock market had returned to September 10 levels and kept going up throughout the end of 2001.6
- The Great Recession, 2008: The DJIA lost more than 50% of its value in a really short time.7 But after a couple of years, the market was stronger than ever before—we were basically in a bull market (a period of large economic growth) from 2009 to just before the coronavirus crash.
- The Coronavirus Crash, 2020: In March of 2020, the COVID-19 pandemic triggered the most rapid global crash in financial history. Still, the stock market recovered ground pretty quick, and the year closed with record highs.8
So, keep your head up. Chances are, you’ve already lived through two major crashes and recessions. It’s part of the rhythm of life!
What Causes a Stock Market Crash?
A stock market crash is caused by two things: a dramatic drop in stock prices and panic. Here’s how it works: Stocks are small shares of a company, and investors who buy them make a profit when the value of their stock goes up. The value and the price of those stocks are based on how well investors believe the company will do. So, if they think the company they’re invested in is headed for hard times, they sell that stock in an attempt to get out before the value drops.
The reality is, panic has just as big of a role in a stock market crash as the actual economic issues that cause it.
Let’s walk through an example from the coronavirus pandemic that shows you just how powerful panic is. As news of the virus spread, grocery and convenience stores all across the world sold out of toilet paper in a matter of days. Was there a toilet paper shortage? Well, yes and no. There wasn’t a shortage before people started panicking. But when people lost their minds and started stocking up on toilet paper, their actions created a shortage!
The same kind of panic can trigger a stock market crash. Once investors see other investors selling off their stocks, they get pretty nervous. Then, stock values start to dip, and more investors sell their shares. Next thing you know, everyone is dumping their stocks, and the market is in a full-fledged crash. Look out below!
Our point here is this: The stock market’s value is 100% based on perception and prediction of the future. No wonder it feels like such a roller coaster ride!
How Did the Coronavirus Crash Affect the Stock Market?
Let’s pretend we’ve got a time machine to take us back to March of 2020 when the coronavirus was officially declared a pandemic (don’t worry, we won’t stay long). While people were binge-watching Tiger King or swarming the supermarkets to buy toilet paper, the global economy was in chaos. Supply chains ground to a halt. Entire industries shut down overnight. And the stock market crashed—big time.
Back in the early days of the pandemic, the stock market took us all on a ride. Global markets (not just here in the U.S.) took a huge plunge, triggering a short-lived bear market (where the stock market falls by at least 20%) and an economic recession in the next few months. If you were checking your 401(k) during those days, you probably felt panicked as you watched your savings disappear.
But after the initial nose dive in March, the market started to inch its way back to recovery. And by the time the New Year’s Eve ball dropped on December 31, 2020, the stock market had regained all of its lost ground—and then some! Did you catch that? All of the major indexes grew in 2020:9
- The S&P 500 gained 15.6%.
- The Nasdaq gained 43.8%.
- The Dow Jones gained 6.5%.
We still have a road ahead of us in 2021, but looking back, we can see that even the big, scary coronavirus crash didn’t knock us out for long. In fact, economists are now saying the recession from the coronavirus crash was the shortest on record—only lasting two months!10
Will the Stock Market Crash in 2021?
All right, let’s just say it: Even though stocks took a tumble in July—for a day—that doesn’t mean that “the big one” is on the way. Let’s get one thing straight: No one can perfectly predict whether or not the stock market is going to crash during the rest of 2021. Just think back to everything that happened last year—you can’t make this stuff up!
So, will the stock market crash in 2021? All we can do is look at the things that will influence the market and your investments throughout the rest of the year. The good news is that major financial analysts predicted steady growth of the bull market in 2021.11 But let’s look at the specifics and where we are now.
Reasons to Feel Cautious About the Stock Market in 2021:
- COVID-19: The coronavirus isn’t going anywhere, and new strains like the Delta variant are causing case numbers to go up.12
- Unemployment: Although we’ve recovered millions of jobs since the country was hit hard in 2020, we’re still experiencing huge unemployment numbers.13
- Inflation: Those stimulus checks come at a cost. With more government spending, we’ve seen an increase in inflation, which has lead to investors pulling back and being cautious.
Reasons to Feel Optimistic About the Stock Market in 2021:
- Vaccinations: As more people became vaccinated for the coronavirus, the stock market responded in a positive way. We’ve already seen more optimism, movement and spending. There’s a lot of pent-up energy in our country, and people are ready to get out and about!
- Old industries reopening: As the world continues to reopen, we’ll see certain businesses gain value in their stocks again (think oil, travel and entertainment).
- New industries growing: Specific industries—tech, e-commerce and biotech—gained tons of ground during the pandemic and will continue to grow and give investors reason to feel confident.14
- Low interest rates: The Federal Reserve has promised to keep interest rates near zero until at least 2023, which will encourage spending.15
We can run numbers and make predictions all day long, but at the end of the day, we have no idea what’s going to happen for the rest of 2021—no one does. So let’s be the kind of people who are prepared for anything the future has in store.
What to Do During a Stock Market Crash
If the market does crash again in 2021, remind yourself that you lived through another crash just last year. In the middle of chaos, you’ve got to focus on what you can control: your attitude, your outlook and your actions. Of course, a crash is scary. Yes, you’ll have to make some changes. But with the right plan to move forward, we can and will continue to make progress. Here are five ways you can respond to a stock market crash:
1. Refuse to panic.
Like we said before, panic can make the crash just as bad as the actual economic issues we’re facing. Don’t fall for it. Dealing with the unknown creates uncertainty, and uncertainty left unchecked can become fear. Choose to stay clear and positive with your thoughts.
2. Cut back on everything.
You can’t control how Congress makes their budget, but you can control how you make your budget! If the economy goes under, it means it’s time to cut out all unnecessary spending of any type. Cancel your gym membership, and don’t even think about having an online shopping spree! Meal plan to save money. Use up the food that you have in your pantry and freezer before you go out and buy more.
Focus on funding the Four Walls before anything else:
Protect yourself and your family. Tighten the budget and hang in there.
3. Follow the proven plan.
If you’ve lost your income: Focus on piling up as much cash as you can. You can pause paying extra toward debt right now. As much as that stinks, don’t worry—it’s not forever. When the tough time passes—and it will—then you can start back up and pay extra on your debt.
If your income is stable: Keep right on working the Baby Steps like you were, and don’t pause your debt snowball. Stay on the plan!
4. If you’re investing, stay invested.
If you’re on Baby Step 4, keep investing 15% of your income (unless you need to pause for a while because you lost your income). Lots of people are tempted to cash out their 401(k) or mutual funds when the market takes a nose dive before they “lose any more money.” But if you pull out now, you’ll guarantee a loss. Stay plugged in and ride it out to give your investments more time to grow and recover. Don’t try to time the market. Focus on time in the market.
5. Meet with an investment professional.
When there are big shifts in the market, schedule a call with your investment professional. You need specific advice for your situation—your age, your funds, the types of retirement accounts you have, and which Baby Step you’re on. Ask your pro if you need to make any changes because of the crash. Don’t be afraid to share what’s on your mind. If you’re married, make sure your spouse is on the call! Make a plan for how you’ll move forward together.
And by the way, if you’ve been playing the investment game without a pro in your corner—don’t. Connect with an investment professional in your area.
Stay Calm During a Stock Market Crash
You’ve got to choose to be patient and think long term here. No matter what the rest of 2021 has in store, remind yourself of the things you know to be true. You care about your family, your dreams and your future—so make your investment decisions with those things in mind. You’ll do a much better job of that if you stay positive and focus on the factors that you can control. So hang tight, take it one day at a time, and we’ll all get through the rest of this year together.