When catalysts aren’t catalysts: a look into the causes of market corrections
I recently met with a young investor and trader, who was just beginning their market journey. During our conversation, he noted he was currently biased towards a market correction but was waiting for a catalyst.
The idea that a catalyst is required for a stock market correction is a flawed one. Corrections can occur without an apparent trigger – just ask those people still debating the cause of the 1987 crash (also known as Black Monday), a severe unexpected stock market crash leading to a worldwide loss of ~US$1.71 trillion).
A crash can occur at any time. While there will always be those who subsequently attribute the crash to an event, a statement, or any other trigger – it is often the case that sentiment shifts without a cause that was obvious at the time.
It is also the case that global events that were thought to trigger a crash, did not. Over the past two years, several events had the potential to act as catalysts for a stock market crash. This assumption is based on historical precedent wherein geopolitical tensions, economic disruptions, or policy shifts had caused a crash. But we can see that when similar global events occurred again, they actually didn’t trigger a significant, sustained downturn.
I have put together a few examples and reasoning behind why certain significant global events did not lead to a crash.
High rates:
Inflation lingered above central bank targets into 2023, prompting aggressive rate hikes globally. The U.S. federal funds rate hit 5.25 – 5.5 per cent (a level unseen since 2001), which had historically been a precursor to recessions and market drops (e.g., the dot-com bust). But this time, investors embraced the “soft landing” narrative as inflation eased to around 3 per cent by late 2024 without triggering mass unemployment. Corporate earnings resilience and a pivot toward rate cut expectations in 2025 kept markets buoyant.
Bank failures:
The sudden failures of Silicon Valley Bank and Signature Bank exposed vulnerabilities in the financial system, raising fears of a 2008-style contagion (The Global Financial Crisis). But rapid U.S. government and federal intervention – including deposit guarantees and emergency liquidity facilities helped contain the damage. Markets recovered within weeks, with the S&P 500 shrugging off the scare.
China’s faltering economy and propery sector troubles:
China’s faltering recovery, coupled with a property sector implosion (remember Evergrande, the Chinese real estate developer, and its ongoing default saga), threatened global trade and commodity markets. But western markets leaned on domestic growth drivers like tech and AI, reducing reliance on China. Beijing’s late-2024 stimulus also softened the blow.
Geopolitical tensions in Russia-Ukraine
The Russia-Ukraine conflict and the war’s intensification, marked by Ukraine’s incursion into Russia’s Kursk region in August 2024, and Russia’s retaliatory energy export cuts, spiked oil prices above US$90/barrel and disrupted grain supplies. In the past, energy shocks (think the 1973 Arab oil embargo) have crashed markets by fueling stagflation. This time, alternative energy sources (U.S. shale, Norwegian gas) and other strategic reserves cushioned the West. Markets treated the conflict as a “known unknown,” with the S&P 500 hitting new highs in late 2024 despite the chaos.
Geopolitical tensions in the Middle East
On 7 October 2023, Hamas attacked Israel which led to the subsequent Gaza conflict. This conflict threatened to destabilise the Middle East, a critical oil-producing region. Fears intensified in 2024, following Iran-backed militia strikes and U.S. military involvement. When comparing these circumstances to the 1990 Gulf War prelude, these events could have been a trigger for a spike in oil prices up to US$150 a barrel. However, oil supply disruptions were minimal as Saudi Arabia and the Organisation of the Petroleum Exporting Countries (OPEC) maintained output. Markets focused on U.S. energy independence and discounted a full-scale regional war, with the Dow Jones Industrial Average index (DJIA) barely reacting beyond short-lived dips.
Geopolitical tensions over Taiwan
Heightened U.S.-China friction over Taiwan, marked by increased Chinese military drills and U.S. naval patrols near the island, raised the spectre of a superpower clash. A disruption to Taiwan’s semiconductor industry (which supplies 60 per cent of the world’s chips) could have tanked tech stocks, as it was considered one of the backbones of the recent market gains. However, because chipmakers like the Taiwan Semiconductor Manufacturing Company (TSMC) diversified production (e.g., they opened new U.S. and Japan plants), investors bet on diplomacy prevailing, and the Nasdaq soared on AI optimism despite the sabre-rattling, the stock market did not crash.
Trade disruptions
From October 2023 – March 2024 the Houthi attacked shipping vessels in the Red Sea (symptomatic of the Israel-Hamas war), forcing ships to reroute around the Cape of Good Hope. This drove up global shipping costs by 200 per cent and threatened supply chains. Past trade disruptions similar to this have spooked markets, but this time around, markets didn’t miss a beat. That could be because companies absorbed higher costs without widespread profit warnings, and central banks signalled tolerance for transitory inflation. Equity markets ignored the noise, as did probably you.
Political uncertainty
In decades past, the advance in popularity of far-right parties such as France’s National Rally and Germany’s Alternative for Germany (AfD), would have been perceived as threatening European Union (EU) cohesion, raising fears of trade barriers or Eurozone instability. Political uncertainty has historically crashed markets, but this time the EU wobbled but held, and European stocks like the DAX stayed resilient, buoyed by export strength.
More generally, we have seen markets maintain resilience in the face of events that may have caused calamity in markets in the past, largely due to central banks and governments acting quickly and decisively. Federal liquidity, debt ceiling deals, or energy market interventions are all ways of averting systemic breakdowns (e.g. federal liquidity helped to soften the ramificatios of the Silicon Valley Bank collapse).
Consequently, investors have displayed a remarkable ability to “look through” crises, treating geopolitical flare-ups as temporary and economic headwinds as navigable.
Meanwhile, the artificial intelligence (AI) boom (think Nvidia’s over 200 per cent gains since 2023) have offset weaknesses elsewhere, propping up indices.
The past two years threw up a gauntlet of crash-worthy contenders: banking wobbles, inflation fights, and a geopolitical powder keg spanning Ukraine, Gaza, Taiwan, and the Red Sea. Yet, markets defied gravity, with the S&P 500 and Nasdaq reaching new peaks by early 2025. Perhaps, after years of volatility (e.g. COVID-19 and the 2022 bear market), markets and traders have been desensitised to “shock” events, suggesting an even bigger catalyst is required to trigger panic. Just remember, the absence of a crash doesn’t mean the system’s invincible – each dodged bullet might just be accumulating the arms required to hit us from behind – a true black swan.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
