Crash of 2008: Three Potential Scenarios

The Financial Panic and subsequent stock market Crash of 2008 are now a boldface reality. So where do markets go from here? Here are three scenarios that we might confront:

1. Good: The market enjoyed a relatively quick recovery after the 1987 crash, surpassing the 1987 peak by mid-1990. Could we be so lucky this time?

2. Bad: The Dow peaked near 1000 in 1966, and then went on a rollercoaster ride, never permanently crossing 1000 until 1983! That’s an effectively flat market for 17 years.

3. Ugly: Japan’s phenomenal postwar growth and an associated bubble peaked with the Nikkei index above 37,000 in 1989. The Nikkei subsequently crashed, and is now trading at the same levels as in 1983, 25 years ago! If this sounds impossible, consider that Japan’s bubble was fueled by reckless lending and a real estate bubble, and that Japan resorted to fiscal stimulus and banking system intervention not dissimilar to the global approach today.

While no one can be certain, I think the middle scenario is not unlikely. Given that the current bear market is now dated to have begun 8 years ago, with the dot com bust, we may still have another decade to go.

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