The last phase of the collapse, which resembles a mania
In retrospect, one might think that the stock market crash was a sudden shock. Indeed, some of the most dramatic events happened very quickly. At the beginning of the pandemic, the US stock index S&P 500 lost 34% in just over a month. The last time Russia defaulted on its debt in 1998, the index crashed from highs to bottom in six weeks, nearly dragging Long-Term Capital Management and the rest of Wall Street with it. The fastest hit was on October 19, 1987, Black Monday, when 20% of the market was destroyed in one day.
However, the largest recessions tend to last much longer. The meat grinder in the stock market that accompanied the financial crisis of 2007-09 continued for 17 months. Talk of the dot-com bubble popping in the early 2000s hides the fact that it took two and a half years to go from peak to bust. The strongest in history, which began in 1929, lasted almost three years.
In each case, losses alternated with rallies that lasted weeks and hectic days when almost nothing happened. Even if they were not calm and boring months, sometimes punctuated by moments of horror, they were long and exhausting recessions. Today, six months after the US stock market began to fall on the back of inflation and monetary tightening, another test may lie ahead. But when the bottom finally hits, what will it look like?
Like a bubble, capitulation—in investor parlance it means the final, tumultuous phase of collapse—is accompanied by a kind of mania. This is part of the crash when something breaks in the collective consciousness and everyone who is going to give up and sell is doing it. Perhaps they are retail investors who kept their composure after losing a third of the capital, but who, seeing another 20% of the value disappear, come to the conclusion that it can indeed fall to zero, and rush to leave the market.