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Another major reason for crashes is economic downturns. High inflation can lead to reduced consumer spending, harming company earnings. Consequently, investors sell off stocks out of fear of declining profits, causing stock prices to tumble. This can spiral into a deeper recession if left unchecked. Additionally, central banks might intervene by raising interest rates, which can further slow economic growth and worsen the situation.
3. Black Swan Events
Unexpected disasters—termed “black swan events”—can also trigger market crashes. These events include natural disasters, pandemics, or geopolitical turmoil. The 2020 COVID-19 pandemic is a recent example, where global markets slumped over 30% in a matter of weeks due to widespread panic over economic shutdowns.