The global stock market has been riding a wave of exuberance. But a crash is coming. It could be very painful.
Several experts have warned that the markets are overheated. One reason is that the prices of shares in artificial intelligence (AI) companies are inflated. This is a bubble, similar to the internet boom years ago. It will end badly.
Another cause is fear of a global economic slowdown. This is largely caused by a combination of falling growth in the developed world, ingrained inflation, and high debt levels.
When people expect the economy to slow, they start saving less and buying fewer goods and services. This leads to weaker growth and lower company profits. That in turn reduces earnings for investors and causes stocks to drop.
In the worst cases, a crisis can trigger financial meltdowns and bankruptcy. The global financial crisis of 2007-09 was a severe example. Millions of jobs were lost, and banks in the US and elsewhere incurred huge losses. Governments stepped in to support the banking system, but recovery was much slower than past recessions without a financial crisis.
The speed of a recovery depends on policy responses. If central banks cut interest rates and buy assets, this can boost confidence and encourage borrowing and investment. But if they move too quickly, it can trigger a sharp market sell-off. The key is to have perspective. Even the steepest declines recover in time, and a financial plan can help keep investors on track.
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