Specific events over the past years that have affected the stock market - Essay Example

Prices remain steady and predictable and investors are confident in the market remaining steady. Markets respond to changes in the economy and a major change in the economy often results in major shifts in the stock market. Market crashes are precipitate by something occurring within the economy or war (or the threat of war). The stock market (New York Stock Exchange) responds to changes by gaining value or losing value. Markets losing value are not good. Changes in the economy can be real or perceived (the belief that something bad is going to happen).

The NYSE (New York Stock Exchange) has responded in the past to changes (some perceived, some real) in the economic environment. Careful study of the stock markets since 1900 shows several events that affected the markets. Crashes in the market were swift and often lasted more than a year before the markets recovered. The most recent stock market crash was from January of 2000 to October 2002. During this time frame the markets were affected by the bursting of the 'tech bubble'. A lot of small '.

com' start-ups went out of business and their investors incurred great losses. Also, during this time frame the twin towers were toppled by a terrorist attack (September 11th 2001). The instability this caused was reflected in market performance. The market dropped 37.8% before it recovered. According to Brenda Spotten, Associate Professor . other symptoms of financial instability may adversely affect the real economy if they impair the ability of the financial markets to provide funds and hence transfer command over resources.

"(Spotten, B p1) In essence, a perceived inefficiency in the market can affect the economy and vice versa.Recently another 'bubble' burst. The housing market currently is in a slump. Good advice for investors would be to not invest in trendy new investments like 'tech bubble' start-ups. Investing in funds that are market resistant (such as a diversified fund) would provide some protection from market instability.Changes in the Federal Reserve lending rate can cause ripples in financial markets.

Sometimes investors watch closely when the Federal Reserve changes interest rates for overnight lending (for banks). In 2004 investors were relieved when then Chairman, Alan Greenspan, raised the interest rate by 2.5%.(Ip, G p1) The markets continued to remain stable.Between November of 1973 and December of 1974 the market lost 45% of its value before recovering. During this time frame the Vietnam campaign was winding down. The retreat of American forces from Vietnam and the Watergate investigation had the affect of reducing consumer confidence in the market.

Going back further in history finds another stock market crash that was the result of events in history. During 1939 and 1942 the United States grappled with entering World War Two. During this time frame the stock market lost 40% of its value. The attack on Pearl Harbor cemented the United States' entry into the war. As wartime production increased, the markets recovered. Prior to the United States' commitment to the war, politics, and fear of war, fueled the market crash during this period.

The early American