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 upheaval. Supply chains ground to a halt. Entire industries shut down overnight. And the stock market crashed—big time.
If you were checking your 401(k) during those days, you probably felt panicked as you watched your savings disappear. And even though the markets regained all of the ground they’d lost by the end of 2020, there’s a lot of worry and speculation out there about 2021.
I want you to be informed about what’s going on, but at the end of the day, worry will only cause harm, not good. In the middle of chaos, we must focus on what we can control: our attitude, our outlook and our actions.
So, will we see another stock market crash in 2021? Let’s take a look at some of the major factors to better understand where we’re headed.
What Is a Stock Market Crash?
A stock market crash is a sudden and significant 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.
To get an overall measure of the value of stocks, we look at indexes like the Dow Jones Industrial Average (DJIA), the S&P 500 and the Nasdaq. If you look at the visual representation 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 many 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 24.8%.1 It took a little over a decade for the economy to get back to predepression levels. Industry from World War II helped get things back up and running.
- The Stock Market Crash of 1987: The market lost 22.6% of its value in one day known as Black Monday.2 But within two years, it had recovered everything it had lost.3
- September 11, 2001: Terrorist attacks in our country caused a major nose dive in the market, but it corrected itself quickly. Just two months later, the stock market had returned to September 10 levels.4
- The Great Recession of 2008: The DJIA lost about 50% of its value in a very short time.5 However, after a couple of years, the market was stronger than ever before—we were essentially in a bull market (a period of significant economic growth) from 2009 to just before the coronavirus crash.
- The Coronavirus Crash: In March of 2020, the COVID-19 pandemic triggered the most rapid global crash in financial history. However, the stock market regained ground relatively quickly and the year closed with record highs in all major indexes.
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 therefore the price) of those stocks is based on how well investors believe the company will perform. 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 entirely.
The reality is, panic has just as big of a role in a stock market crash as the actual economic factors that cause it.
Let me give you a recent example from the coronavirus pandemic that shows you 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 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.
My point is this: The stock market’s value is entirely based on perception and prediction of the future. No wonder it feels like a roller-coaster ride!
How Did the Coronavirus Crash Affect the Stock Market?
So, 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 following months.
But after the initial nose dive in March, the market began to inch its way back to recovery. And by the time the 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 (which help measure different sectors of the market) grew in 2020:6
- The S&P 500 gained 15.6%.
- The Nasdaq gained 43.7%.
- The Dow Jones gained 6.6%.
We still have a long road ahead of us in 2021, but looking back, we can see that even the big, scary coronavirus crash didn’t knock us off course for long.
Is the Stock Market Going to Crash in 2021?
We need to establish one important fact: No one can accurately predict whether or not the stock market is going to crash in 2021. Just think back to everything that happened last year—you can’t make this stuff up!
All we can do is evaluate which indicators will influence the market and your investments in the coming year. The good news is that, overall, major financial analysts are predicting steady growth of the bull market in 2021.7 But let’s look at the specifics.
Reasons to Feel Cautious About the Stock Market in 2021:
- COVID-19: The coronavirus isn’t going anywhere, and new strains are developing.8
- Unemployment: Although we’ve added millions of jobs since the country was hit hard in 2020, we’re still experiencing significant unemployment numbers.9
- Inflation: Those stimulus checks come at a cost. With increased government spending, we’ll probably see an increase in inflation, which could lead to investors pulling back.
Reasons to Feel Optimistic About the Stock Market in 2021:
- Vaccinations: As more people are vaccinated for the coronavirus, we’ll see an increase in 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.10
- Low interest rates: The Federal Reserve has promised to keep interest rates near zero, which will encourage spending.11
We can run numbers and make predictions all day long, but ultimately, we have no idea what’s going to happen in 2021. 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 crashes again in 2021, remind yourself that you lived through another crash just last year. Of course, a crash is scary. Yes, you’ll have to make some adjustments. 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.
As we talked about before, panic can make the crash just as bad as the actual economic hurdles 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. Go into conserve mode.
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. This won’t last forever.
3. Follow the proven plan.
If your income isn’t guaranteed and there’s another crash, you might need to make some adjustments. Pause paying extra toward debt right now but keep your “focus forward” mindset. Save up extra money to fund your emergency fund, and when the tough time passes—and it will pass eventually—then you can start back up and pay extra on your debt.
4. If you’re investing, stay invested.
The most basic principle of investing is to buy low and sell high. When stock prices dip low in a crash, I want you to think of it as buying on sale! Don’t try to time the market. Focus on time in the market.
If you’re on Baby Step 4, keep investing 15% of your income (unless you need to pause temporarily due to unstable 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 guarantee a loss. Stay plugged in and ride it out to give your investments more time to grow and recover.
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 adjustments in response to 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 solo, I encourage you to connect with an investment professional!
Remain Calm During a Stock Market Crash
Choose to be patient and think long term. No matter what 2021 has in store, I want to remind you of the things that we know! We know that we care about our families, our dreams and our futures. We’ll all do a much better job of that if we stay positive and focus on the factors that we can control. We’ll get through this year together.