Investing legend Jim Cramer recently shared some valuable insight on market crashes and sell-offs in a recent CNBC segment. With decades of experience in the financial world, Cramer pointed out key differences between past crashes and the recent market volatility caused by the Covid-19 pandemic.
According to Cramer, investors should not only be prepared for a market crash but also understand the underlying causes that may lead to such a crisis. He highlighted two significant market sell-offs in his career: the crash of 1987 and the financial crisis of 2007-2009. Cramer emphasized that the recent market downturn due to the pandemic was different from these historical events as the market quickly rebounded.
Cramer explained that the crash in 1987 was not the result of an economic failure but rather the mechanics of the market. He recounted the events of “Black Monday” and “Terrible Tuesday,” where the Dow lost more than 22% of its value in a single session. However, due to decisive action by then-Federal Reserve Chair Alan Greenspan, the market stabilized in the following days. In contrast, the financial crisis of 2007 took years for the market to recover, with the Dow not reaching its bottom until 2009.
Drawing parallels to more recent “flash crashes” in 2010 and 2015, Cramer highlighted the role of futures in causing market instability. He explained how the unfamiliarity with these financial instruments in 1987 led to the rapid downturn in the market, as traders were unprepared for the power of futures contracts. Cramer stressed the importance of understanding these market mechanisms to protect investments during volatile times.
As investors navigate uncertain market conditions, Cramer’s insights serve as a valuable guide to understanding the dynamics behind market crashes and developing a strategic response plan. By staying informed and prepared, investors can weather market storms and seize opportunities for long-term financial success.
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