Reflections on major sharemarket corrections

With the small cap market here in Australia in the midst of a severe market correction as we reach the tail end of a difficult 2026, many investors may be experiencing a serious sharemarket correction for the first time and in the first article in a two part series I have put together some of the insights from my experiences and observations when markets corrected in the past.

While they are never welcomed by stockmarket investors, sharemarket corrections are an inevitable part of any stockmarket cycle. Corrections often happen fairly suddenly and following a period of good gains in the sharemarket and while most investors would rather markets never fell, corrections are often necessary to shake out the excesses that are often built up in the bull phases of the sharemarket.

Black Monday

My first exposure to a serious market correction was in 1987 – and one I still remember very clearly as I was a young man who had just started following and learning about the sharemarket. With my very limited amount of knowledge, I had started investing as a small, retail investor in the sharemarket in the year before it happened. The Australian sharemarket – in line with overseas sharemarkets had risen strongly through 1985, 1986 and 1987 – buoyed by a wave of deregulation in many parts of the world such as the US and UK, with Australia also participating. As part of this, we saw the Australian dollar being floated, interest rate and credit markets deregulated and 16 new banking licences issued in Australia allowing large foreign banks such as Chase Manhattan and Standard Chartered to come to Australia very keen to do business and to lend money. These changes in Australia helped spur and fund a series of high profile, debt-funded takeovers by entrepreneurs such as Alan Bond and Robert Holmes a Court as well as many other entrepreneurs.

A stronger gold price at the time also led to many mining stocks (mostly speculative gold stocks) going to dizzying heights. It seemed like the good times were here to stay and many investors believed that the good times were going to roll on for many more years.

This mood changed overnight when investors in Australia woke up one fine October morning to the news that the American Dow Jones index – for no apparent reason - had crashed 23% overnight – the largest one-day stockmarket crash since 1929 (which had led to the Great Depression in 1932). The Australian sharemarket followed suit falling almost 5% on 20 October 1987. Over the ensuing month the Australian sharemarket – in line with overseas markets - continued to fall until it reached a level which was 50% of its October peak, before bottoming out in late November and finding a base from which it would gradually recover.

I remember at the time I’d met an older investor called Ivo Narcisi in the gallery at the Sydney Stock Exchange in the mid-1980s who had a copybook that he would update in pencil of his sharemarket investments – which consisted totally of around 40 speculative gold and resource stocks. By September 1987, I was helping him track his portfolio on a Lotus 1-2-3 spreadsheet and had watched his portfolio increase to around $530,000. After the stock market crash in October 1987, I did his valuation again for him in November 1987 and by then his portfolio had fallen to around $50,000 in value – a 90% drop in value, something that I will never forget with his portfolio never really recovering in value for many years after.

To this day, nobody is really sure what caused the 1987 crash but I learnt a very important lesson through that period. 

While almost every single share price falls heavily in a correction – the companies with real earnings, cash flows and sustainable dividends are the companies that recover over time when the panic ends and rational investors return to the sharemarket. 

Conversely the vast majority of the speculative companies that boomed during the bull market end up trading at fractions of their boom time prices and most may never recover to anywhere where they traded in the boom.

The dot com boom and bust

The next serious market correction I remember was when tech stocks collapsed after the boom which happened between 1999 and 2001. As the Internet was starting to be used during 1999, investors became infatuated with all things tech, internet and telco-related so that these sectors all around the world – led by the Nasdaq in the US – boomed with many unprofitable companies going to crazy levels.

The media and investors around the world, including Australia became infatuated by stocks which the media and brokers said were part of ‘the new economy’ – stocks on the ASX like Solution 6, Sausage Software, Onetel, Davenet, Ecorp and many other speculative companies and even though none of these companies made any profits, their stocks were worth many billions of dollars in the tech boom of the time.

Conversely, profitable and well-established companies like Woolworths, Amcor, Brambles and many others of the like – that were making good profits and paying good dividends – were nicknamed ‘old economy’ companies by many brokers and the media with their stock prices heavily penalised at the time because of the commonly held belief amongst many investors - crazy as it seems today - that technology would make these businesses redundant. This led to the stock prices of these types of companies to fall heavily during the tech boom, where they ended up trading at what were bargain prices (and which fortunately we were buying for our new Fund at IML).

As the Fed in the US started raising interest rates, this appeared to trigger a huge reappraisal of risk by many investors and it seemed to cause a panic amongst investors in the Nasdaq, which led it to fall almost 80% from its peak in the ensuing period with all the Australian ‘tech’ related stocks similarly being smashed. At the same time many of the so called ‘old economy’ stocks recovered strongly during this period as many decided that well established companies were not going to disappear overnight and became attracted to companies with real cashflows and earnings.

The Global Financial Crisis

The next serious correction came in 2007, which was triggered by the collapse of the sub-prime mortgage market in the US. The US housing market was very strong between 2003 and 2007 as lending to sub-prime borrowers fuelled the boom with up to 40% of all US housing loans during this period being NINJA loans (loans made to people with No Income & No Jobs or Assets). The majority of these loans were packaged into mortgage bonds by Wall Street investment banks and sold to financial institutions and investors all around the world – greatly helped by the leading ratings agencies in New York (incredibly) assigning these mortgage bonds a AAA rating.

When the US housing market started to correct following the long boom, this caused many of these mortgage loans to default and over a period of 6 months led to a total collapse in confidence in credit markets globally as banks stopped lending money to each other and refused to extend existing companies’ loan facilities which led to a Global Financial Crisis (the GFC). As a consequence of this very serious credit crisis, sharemarkets all around the world were in freefall for several months as investors fretted about an economic collapse, which was only ultimately averted when governments globally stepped in with trillions of dollars of bailouts and by also giving guarantees to their countries’ banks to help restore confidence and avoid any banks collapsing. This was a very serious crisis during which extreme Government actions helped to unfreeze credit markets and sharemarkets eventually recovered thereafter.

The European debt crisis

Another pretty serious sharemarket correction occurred around 2012, following on from the GFC, when concerns about the debt burden and excessive budget deficits in certain European Union countries led to further credit market tremors. This culminated in the Greek debt crisis which forced the EU to put together a large bailout package for Greece, along with other financial aid packages to Ireland, Portugal, Spain and Cyprus to help stabilise credit markets and sharemarkets and the share prices of sound companies recovered once again.

The Covid Crash

I am sure many of the readers of this article remember the sharemarket correction in 2020 which was triggered by governments’ actions worldwide to contain COVID-19 by imposing very severe travel and other pretty draconian restrictions which forced many businesses globally to shut down. Sharemarkets fell heavily during the early weeks of these restrictions being imposed as many businesses around the world such as airlines, travel agents, retail outlets and the like – faced imminent bankruptcy due to the measures put in place. This forced governments around the world to spend trillions of dollars in support measures to keep many businesses solvent and from their economies falling into serious recessions. As a result of this record Government spending, sharemarkets around the world recovered fairly quickly from their COVID lows - with the share prices of many online companies reaching record highs as consumers – stuck at home because of restrictions and many receiving fairly generous government handouts - bought goods online in what was a very extraordinary period!

The timing of sharemarket corrections is almost impossible to pick and they can be normally very difficult and emotional periods for sharemarket investors to have to live through, although what I have learnt in my 40 years in markets is that it pays to stay calm and to try to think rationally and ignore a lot of the noise and panic that normally abounds in any sharemarket correction.

Sharemarket corrections often follow similar patterns. As mentioned, while they are generally impossible to predict, investors must be mindful of certain indicators which can point to them coming sooner rather than later.

In my next article I'll share the lessons I learned about surviving sharemarket corrections. You can 'follow' my profile to be notified when that article is published.