Every stock market crash is different. The special feature of the current short fall is the pace. Just a few weeks ago, the stock exchanges were close to their highs. Martin Lück, Blackrock investment strategist for Germany, told SPIEGEL at the time: “The risk to global economic growth from the corona virus is probably not as serious as initially assumed.”
Not only economists like Lück had underestimated the virus at that time. But meanwhile sheer panic has spread to the markets: Since February 19, the Dax has lost 39 percent of its value. Compared to previous stock market crashes, this is the fastest loss ever (see chart). Never before in its more than 30-year history has the most important German stock market barometer lost so much in value in just 28 days.
Such a sharp collapse of the stock markets is otherwise without a historical model. “The development this year is a blatant exceptional situation. The loss of production is a reflection of a massive exogenous shock, for which there have been no comparative models in recent economic history,” says Stefan Kooths, economic director at the IfW Kiel Institute for Economic Research.
Only in 1987 did things go downwards at a similar pace: The global stock exchanges lost 37 percent in 28 days. When dealing with the crash of 1987 it came out that computers had accelerated the rapid crash. There was no specific trigger.
How long will it go down?
The brutal speed of the current stock market crash becomes even clearer when compared to the global financial crisis of 2008. It took more than three times as long to accumulate a loss of a similar magnitude: only after 102 days had the Dax achieved a loss of more than 37 percent. It hit its lowest point of minus 44.5 percent after 207 days.
The origin of the current crisis differs fundamentally from that of the years 2007 and 2008. It is not the failure of the banks and the construction of highly complex financial instruments that are causing chaos in the economy this time. The current crisis was triggered by a virus that is spreading exponentially and threatens to paralyze entire economies. There has never been anything like it.
Precisely because of this crisis trigger, investors around the world were caught on the wrong foot, which led to rapid panic sales. “This pandemic has triggered the fastest equity risk reevaluation in 30 years,” said Bram Kaplan, equity and foreign exchange strategist at major US bank JP Morgan, recently told CNN. In view of this, what corporations otherwise report in terms of regular sales or sales figures hardly matters. Everything is overshadowed by the crash, everything is sold.
The Dax managed to put on a “black trading day” twice in the past few weeks. Two days from the past few weeks appear in the top ten of the worst German stock market days: March 9 (when the Dax lost 7.9 percent) and March 12 (when it lost 12.2 percent). Only on October 16, 1989 was the minus greater by day: The reason was concerns about an end to the merger fever at the time.
But the origin of the current crisis also gives reason to hope that it will at least not take that long for the downward slide on the stock exchanges to be overcome. According to IfW Kiel scientists, the chances are good that they will be able to get out of the production valley more quickly than during the 2008 financial crisis. According to the scientists, the positive scenario is that the current stress situation only lasts until the end of April and then the situation gradually changes from May relaxed. The gross domestic product would then amount to a minus of 4.5 percent for 2020.
The economy would only recover in this scenario in 2021, but it would recover strongly. That would then also result in rising stock prices.