Markets are basically not complicated things. Despite what you might read in the paper or hear on TV, despite the befuddling jargon, markets consist of buyers and sellers, and of perception and emotion.
When there are more people wanting to buy, than there are people selling, markets rise. The law of supply and demand dictates that prices will increase. The upward trend is maintained by the wealth generated by increasing prices, leading to investor confidence. The expectation that the rise will continue encourages people to buy more, as they believe they will be able to sell at a profit.
When more people want to sell, however, prices start to fall. Buyers can choose and someone will always be prepared to sell at a lower price than others. There are many reasons why people sell, but when fear of falling prices kicks in, those speculating will feel the need to sell quickly before prices fall and they lose their expected profit. Of course, this fuels the downward trend, eroding confidence.
As the prices fall, as fewer people buy and demand drops, suppliers get less for their products, and their sales and profits decline. This means less money and a need to retract their business, leading to reduced production and job layoffs. And that means even less spending.
So how does it all turn around? In much the same way. People decide to buy again. As long as there are people with some money tucked away, at some point they will perceive prices as bargains, and begin to buy. Demand starts to pick up. This can happen in a number of ways, mostly through consumption (ordinary people buying things to consume, like groceries), investment (purchases to hold for a longer term, like property), government stimulation, and exports (overseas markets beginning to spend money on imported products). As spending begins again, people become more confident about investing in businesses through the sharemarket, and the perception changes to an optimistic one.
The dilemma for the average person is whether to save or spend. Spending is what will stimulate the economy and lead to recovery. However, what happens to you if you spend everything before your income improves to the point where you receive a net gain? Many people have lost their jobs – it will be difficult for them to be brave enough to spend up large, if they have no idea where to get more money. People with savings may be very pleased to have this nest egg, and are not likely to want to break into it due to the uncertainty of the economic future. The worse things get, the longer the recovery will take, because the longer it will take for people to regain their confidence.
The heady days of the 1990s and early 2000s are in stark contrast to the current situation. Perhaps there is a lesson to be learned. In my opinion, it would be about avoiding extremes. About not being overly greedy and trying to squeeze every last cent out of your house sale, profit margin or investment rate. About paying a fair price for supplies. About sharing the wealth, but also of thinking about the future and keeping something tangible back (not something like the promise of the price of pork bellies in 20 years).
The market will recover, but will you?