Yes, there are indeed recognizable patterns in how and when stock market crashes end. Here are the key ones:
Investor capitulation – A crash often ends with a phase of extreme selling panic, where even long-term investors give up and liquidate their positions. This “capitulation phase” is characterized by extremely high trading volumes and dramatic price declines.
Valuations below historical averages – Markets typically return to a kind of equilibrium when valuations (P/E ratio, price-to-book ratio) fall significantly below their long-term average values.
Liquidity injections – Central banks and governments frequently intervene when the crash reaches a certain magnitude by lowering interest rates, pumping liquidity into markets, or creating direct bailout packages.
Survival adaptations – Remaining companies adjust their business models, reduce costs, and strengthen their balance sheets, which creates the foundation for a long-term recovery.
Consolidation – After the initial drastic decline, there’s often a period of sideways movement where the market attempts to form a bottom. This phase can last months or even years.
Sentiment indicators – A crash approaches its end when extremely negative sentiment indicators prevail and the majority of investors are pessimistic. This is often referred to as a “contrarian indicator.”
Institutional buyers return – When large, well-informed investors like pension funds or sovereign wealth funds begin buying again, this often signals the beginning of recovery.
Regulatory reforms – Severe crashes are frequently followed by regulatory changes aimed at addressing the causes of the crisis (Glass-Steagall after 1929, Dodd-Frank after 2008).
Societal adjustment – With profound crashes, societal behavior often changes regarding risk, frugality, and investment philosophy.
The duration until full recovery varies greatly: the market took about 25 years to regain its peaks after 1929, while recovery after the 2020 Corona crash took only a few months. The nature of the triggering event, the structural problems behind it, and the policy responses significantly influence how and when a crash truly ends.