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Fascinating Facts about Market Crashes

Yesterday, Singapore’s market barometer the Straits Times Index (SGX: ^STI) fell by 1.39% to 3,154. At that level, the index is now 6.70% lower than its 52-week high of 3,388 points that it crested back in late July.

The last time Singapore’s market had a big fall in a calendar year was back in 2011 when it fell by 23% from peak-to-trough between January and October.

Are we due for another big one soon? Is the stock market’s current decline telling us anything bad which might happen to Singapore’s economy in the future? In answering these questions, there are fascinating facts about market crashes which would be revealed.

The stock market and the economy

Let’s deal with the second question first. There’s a much richer market history in the U.S. as compared to Singapore, so let’s look at what the States can tell us.

metrics and market returns

Source: Morgan Housel, Fool.com

Some of you might be surprised by this, but changes to the economy have in fact, very little to tell us about what shares might do over the long-term. As you can see in the chart above, even big and seemingly important economic data like U.S. government debt to GDP (gross domestic product) ratios and U.S. GDP growth trends have very poor predictability when it comes to long-term market returns there.

In addition, there have been many times when the U.S. markets have corrected or crashed even when there was simply no recession in the country taking place at that time. As Ben Carlson said in the tweet below, “sometimes stocks just fall.”

Sure, there are big differences between Singapore and U.S.A. – but when it comes to the financial markets, where human psychology (which has huge commonalities between peoples from different societies) has a towering presence in how affairs play out, there’s a lot we Singaporeans can learn from a long look back at history even from foreign shores.

The big market crash

Coming to the first question of “are we due for another big crash soon,” the truth is that no one knows. But, here’s some incredible food for thought from my colleague Morgan Housel when it comes to how investors might want to approach a market crash:

You’re supposed to like market plunges because you can buy good companies at lower prices. Before long, those prices rise and you’ll be rewarded.

But you’ve heard that a thousand times.

There’s a more compelling reason to like market plunges even if stocks never recover.

The psuedoanonymous blogger Jesse Livermore asked a smart question this year: Would you rather stocks soared 200%, or fell 66% and stayed there forever? Literally, never recovering.

If you’re a long-term investor, the second option is actually more lucrative.

That’s because so much of the market’s long-term returns come from reinvesting dividends. When share prices fall, dividend yields rise, and the compounding effect of reinvesting dividends becomes more powerful. After 30 years, the plunge-and-no-recovery scenario beats out boom-and-normal-growth market by a quarter of a percentage point per year.

On that note, I made a fascinating discovery a few weeks back on just how safe corporate dividends can be even in the worst of times. Here’re some notable excerpts from an article I recently wrote on the topic:

In Singapore, the Great Financial Crisis of 2007-09 caused the Straits Times Index to fall by more than two-thirds from peak-to-trough. But when it comes to the dividends the current index constituents were dishing out, the decline was far less severe (as seen in the table below). Some of the blue chips, such as Oversea-Chinese Banking Corp. Limited (SGX: O39), Jardine Cycle & Carriage Limited (SGX: C07), and Hongkong Land Holdings Limited (SGX: H78), managed to maintain or even grow their dividends throughout that episode.

Share Change in dividend from Financial Year 2007 to FY2009
DBS Group Holdings Ltd -17.6%
United Overseas Bank Limited -18.6%
Sembcorp Industries Ltd 0.0%
Keppel Corporation Limited -40.6%
Oversea-Chinese Banking Corporation Limited 0.0%
SIA Engineering Company Limited 33.3%
Singapore Exchange Limited -27.8%
Singapore Telecommunications Limited -39.0%
Singapore Press Holdings Limited -3.8%
Wilmar International Limited 215.0%
Sembcorp Marine Ltd 71.8%
Ascendas Real Estate Investment Trust 19.1%
StarHub Ltd. 18.8%
Singapore Airlines Limited -60.0%
ComfortDelGro Corporation Limited -41.7%
Singapore Technologies Engineering Ltd -21.3%
Golden Agri-Resources Ltd -29.6%
Noble Group Limited 75.2%
CapitaMall Trust -33.7%
Olam International Limited 0.0%
Jardine Strategic Holdings Limited 11.1%
City Developments Limited -73.3%
CapitaLand Limited -30.0%
Hongkong Land Holdings Limited 23.1%
ardine Matheson Holdings Limited 38.5%
Thai Beverage Public Company Limited 13.8%
Jardine Cycle & Carriage Limited 34.9%
Average 4.3%

Source: S&P Capital IQ

Foolish Bottom Line

So to sum up what’s in here, some fascinating facts about market crashes are that 1) they can have almost nothing to do with what the economy does; and 2) market crashes – and permanent ones at that – can really be a good thing because the power of reinvesting dividends is breath-taking.

Keep these in mind if Singapore’s markets continue sliding. More importantly, don’t panic.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.