Market crashes: what happens when investors believe the impossible

Market bubbles – and subsequent crashes – are rarer than many people think, but all are driven by the same thing, says Merryn Somerset Webb: investors’ belief in something that always turns out to be impossible.

US stockmarket indices
US stockmarket valuations hit bubble levels some time ago
(Image credit: © Michael Nagle/Bloomberg via Getty Images)

For those confused by the market this year, I have a suggestion: invest in the Practical History of Financial Markets course run by the Edinburgh Business School (you can do it online – no need to come to chilly Scotland). One of the modules focuses on the history of extreme market valuations – what causes them and what crashes them.

The first thing to note is that, while we love to talk about bubbles, periods of extreme valuation in the stockmarket don’t really happen very often. Of the 29 business cycles in the US since 1881 only a few have ended in one, according to Professor Russell Napier. But, while each has had its own peculiarities, the basic driver has been much the same: the ability of investors to believe absolutely in something that always turns out to be impossible. Namely that, thanks to some “marvels” of technology, corporate profits will stay high (and probably rise) indefinitely and that interest rates will also stay low indefinitely.

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Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.