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The Psychology Behind Market Meltdowns

Mar. 09, 2020 12:36 PM ET5 Comments
Malvin Spooner profile picture
Malvin Spooner


  • Panic is precursor to market meltdown.
  • Psychology is an important determinant of bear markets.
  • It won't be over until 'acceptance' takes over sentiment.

We need panic! It's the first step towards recovery - but not the last. A true market meltdown, if this is one, starts with panic - and we're not there yet. The following is a direct quote from my A Maverick Investor's Guidebook:

Here is just a small sampling of the great financial panics since the turn of the twentieth century:

  • Stock Market Crash of 1929 (aka the Great Crash)
  • The 1973–75 recession
  • The recent financial crisis of October 2007 to November 2008

A market panic occurs in a few steps:

  • Stock markets fall rapidly and unexpectedly. This is because there is suddenly far more sellers of securities than there are buyers. News travels fast. Markets are actually an information industry.
  • As stock prices decline (as well as the prices of other assets such as bonds, real estate, and commodities such as oil or copper), all sorts of investors begin to panic and try to sell their stocks and any other assets deemed to be vulnerable—and this all happens at the same time. Anyone who might have been interested in buying assets is spooked by the landslide of selling and postpones any action.
  • Once the dust settles, volumes on stock exchanges and other markets dry up. Sellers realize they can’t sell if there are no buyers. Potential buyers are worried that anything they buy will devalue even more. Checkmate.

Photo by: Daniel Naupold/Reuters

What's been missing until recently is real panic. There are too many pundits in the press and on television telling everyone not to panic, and that once the novel coronavirus is under control things will be back to normal. This presumes that it is only the virus that is the problem. As I've mentioned in previous articles, excessive liquidity caused outrageous valuations, and the actual global slowdown are the issues - sparked by COVID-19. When

This article was written by

Malvin Spooner profile picture
Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored An Investment Maverick's Guidebook which blends his experience touring across the heartland of the United States on his Harley with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources predicted the prior boom in natural resources - published early in 2004. He now teaches Finance, Economics, Business Strategy & Professional Ethics course at a Canadian college.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

wald22 profile picture
Debt should not be considered an asset. The value of debt needs to be written down. Same was true in 1929 and it is true today. Over the next 5 years everything will be reduced in value.
Malvin Spooner profile picture
It happens when borrowers default. Will be plenty in oil patch.
wald22 profile picture
The bottom line is that we've had severe flu's before without a recession and when we did have a downturn, the economy bounced back. Presently the stock market is pricing in a steep drop in profits, which is a very sure thing because those profits never existed in the first place. Using debt as a vehicle to buy back shares to increase earnings per share is not the same as earning those profits from profits made earning them. US corporations have a lot of money invested in China that is now dead money.
jbbson profile picture
To the first: why buy when Im already a losing? would you initiate a new position, based on fundamentals at the new price?

"to the second: Who relies on news from China?" everybody that panicked
Malvin Spooner profile picture
I would initiate when the ‘experts’ STOP SAYING THIS IS TRANSITORY. When they capitulate then it’s time.
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