If you happen to browse YouTube for various topics related to the stock market, you might notice a strange phenomenon: YouTube creators seem mildly obsessed with all things related to a stock market crash.
Content creators apparently enjoy talking about a looming stock market crash, advising viewers and subscribers of the warning signs we should all pay attention to. The video thumbnails usually show various hosts mimicking a ‘terrified’ looking face, along with a line graph ominously pointing downwards. The message is clear: be fearful.
The driving force behind this sort of material is straightforward, and you’ve likely figured it out already: it’s clickbait. Viewers are often more drawn to a video broadcasting an impending crash than one conversing about a steady market. Consequently, it’s no surprise to come across videos with such dramatic narratives.
Of course, sometimes there are good reasons to be slightly nervous about a potential crash, based on sound reasoning and common sense logic. Mostly, however, the warnings are merely a way to drive engagement through the basic human emotion of fear.
But the reality is that a crash is almost impossible to predict with any accuracy. There are a whole host of reasons and events that contribute to a collapse. Without the use of a crystal ball, most people are unable to anticipate them until they have already begun.
Historical Insights
However, while no one can realistically foresee an immediate crash, there are things we can do to educate ourselves about the general factors that contribute to a crash and, in turn, become better informed.
To do that, we need to look at previous stock market crashes and analyze the underlying conditions that led to them. In doing so, we will be better equipped to read the signs and make a judgment call on the likelihood of future problems.
Through this article, we shall do just that – a look at different stock market crashes through history – starting with the infamous depression of the thirties, before moving on to more recent events, including the 2008 crash. Can we see any commonalities with each crash? Do they come with any warning signs? More importantly, how likely are they to happen again?
We shall get to that, but first, what exactly quantities a stock market crash? Let’s quickly clarify.
What Exactly Is a Stock Market Crash?
When a drastic plummet in stock prices hits the financial markets, we term it a stock market crash in the broader sense of the word. There is no one-size-fits-all definition to the phrase ‘crash,’ but the label is typically assigned when leading stock market indexes experience a swift drop in value exceeding 10%, give or take a percentage or two.
Stock market crashes are notorious for their unpredictability, often occurring right after extended bull market phases where stock prices have been on a continuous ascent. The telltale signature of a market crashing is the panic-induced selling by investors aiming to quickly close their positions either to mitigate losses or answer a margin call.
Even though they occurred relatively swiftly, the aftermath of the biggest stock market crashes often had enduring and profound effects that lasted for quite some time. With that in mind, let’s take a quick trip through history and explore some of the most significant stock market crashes to date.
Notable Crashes in Stock Market History
The Great Crash (1929)
The most severe crash in history took place in 1929, acting as one of the triggers for the Great Depression. The crash abruptly halted an era known as the Roaring Twenties, characterized by considerable economic expansion and a booming stock market.
Those so-called “roaring” twenties had been pretty amazing in economic terms, as The Dow Jones Industrial Average soared from 63 points in August 1921 to a staggering 381 points by September 1929, a sixfold increase. However, things quickly went from one extreme to the other, as the descent started on Sept. 3, with the rate of decline escalating during a two-day crash on Oct. 28–29.
In turn, The Dow experienced a 13% fall on what was called Black Monday and a further decline of almost 12% on Black Tuesday.
By the time mid-November 1929 arrived, the Dow Jones Industrial Average had nearly halved in value. A bear market had taken hold, indicating a value reduction of more than 20%. The Dow continued to decline until the summer of 1932, when it finally bottomed out at 41 points, a truly horrifying 89% below its peak. It wasn’t until 1954 that the Dow managed to regain its pre-crash value.
So, what lessons, if any, can we learn from the most famous crash in history? The most obvious and underlying primary trigger for the 1929 stock market crash was the overuse of leverage. In short, both individual investors and investment trusts started purchasing stocks on margin, many only paying 10% of a stock’s value to secure it under margin loan terms.
These investment trusts frequently bought shares of other highly leveraged investment trusts, creating a network of intertwined destinies. Simultaneously, consumers were increasingly relying on credit for their purchases. The bursting of this debt bubble led to the most devastating stock market and economic crash witnessed in modern history.
The Great Recession (1937)
Not so much a stock market crash and more of a general recession – albeit a pretty monumental one – the great recession of 1937 is worthy of inclusion in this list owing to the nature of the recession and its similarity (in terms of consequences) of a stock market crash.
This particular economic stumble arrived just as the nation was navigating its recovery from the harrowing effects of the Great Depression. Analysts primarily attribute the recession’s occurrence to the Federal Reserve and Treasury Department’s decisions that prompted a contraction in the money supply, complemented by other restrictive fiscal policies. These policy shifts triggered a 10% decline in the real GDP and propelled the unemployment rate to one-fifth of the working population.
In the year leading up to this downturn, Federal Reserve policymakers enacted a measure that effectively doubled reserve requirement ratios, aiming to cut down excess bank reserves. In tandem, the Treasury Department, starting in late June 1936, began to quarantine gold inflows, effectively removing them from the monetary base.
Basically, this action blocked their influence on monetary expansion. However, the tide began to turn when the Federal Reserve and Treasury Department reversed their course, and the Roosevelt administration embraced expansionary fiscal policies, effectively putting an end to the recession.
Black Monday (1987)
When we think back to stock market crashes that left a lasting impression, the 1987 Black Monday event inevitably comes up as one of the more infamous and memorable. On this fateful day (October 19th, 1987, to be precise), the Dow Jones Industrial Average nosedived nearly 22%.
This marked the most severe single-day fall in the history of the stock market, eternity branding the day as Black Monday. Following this dramatic decline, the month’s remaining days weren’t any kinder to investors, either. In fact, by the onset of November 1987, most significant stock market indexes, including the New York Stock Exchange, had shed over 20% of their value.
What was the cause of this financial Armageddon? Essentially, the stock market crash of 1987 didn’t arise from any one singular event but rather an intricate combination of factors that spurred a sell-off. These included a burgeoning U.S. trade deficit, the rise of computerized trading, and significant Middle East tensions.
Interestingly, the surge of program trading (computers conducting automated trades) was perhaps the most impactful driver of this market crash. These clever machines seemed to spring out of nowhere and were programmed to generate increased buy orders when stock prices ascended and increased sell orders when prices descended.
Consequently, as sell orders swarmed the market on Black Monday, it triggered panic selling among other investors in the stock market.
One silver lining to the Black Monday debacle (if you can call it a silver lining) was that it was primarily triggered by programmatic trading and not by an underlying economic crisis. As a result, the stock market rebounded comparatively swiftly.
The Dow Jones Industrial Average began its recovery in November 1987, and by September 1989, it had successfully clawed back all its losses. So, a staggering crash caused untold financial crises worldwide – but with the ‘benefit’ of being quite short-term in nature.
Dotcom Boom and Bust (2000)
The dot-com bubble of the 1990s to early 2000s was more than a simple market phenomenon – it was a heady mix of intense speculation and investment in internet-based businesses amid a booming bull market. Given all the underlying circumstances surrounding this crash, catastrophe was inevitable, really.
Actually, of all the stock market crashes on this list, this one especially should have been the easiest to predict. In hindsight, it is quite surprising that it wasn’t.
In short, equity markets swelled dramatically, with the tech-centric Nasdaq index spiraling up five-fold within this period. But then the late 2000s brought a chilling reality check, as investors recognized the shaky business models of many of these dot-com enterprises, heralding a bear market that stretched over two years and spanned the entire stock market.
Investors and venture capitalists had been firing out huge amounts of funding for new online-based businesses without sufficient due diligence. Billions of dollars were readily handed out during this time, seemingly to anyone with even half an idea relating to e-commerce. Within time, investors began to realize they may have been funding businesses built on weak foundations, and as they began to pull out, the bear market ensued.
This was a pretty severe stock market crash, with the Nasdaq index tumbling by a drastic 76.81%. From its apex of 5,048.62 on March 10, 2000, it crashed to 1,139.90 on October 4, 2002. This led to a significant number of dot-com stocks going under and vaporizing trillions of dollars of investment capital. The Nasdaq took a long 15 years to recover, finally reaching its peak again on April 24, 2015.
Before looking at the other examples on this list, now might be a good opportunity to quickly explain a phenomenon that has contributed directly to one or two big crashes, including the dot-com boom. The phenomenon is known as an asset bubble.
Asset Bubble Explained
Also known as a financial, economic, or speculative bubble. These bubbles have played a role in various historical events, such as the stock market bubble of the 1920s leading up to the Great Depression and the real estate bubble of the 2000s.
An asset bubble transpires when the price of an asset skyrockets over a brief period and trades considerably higher than its fundamentals warrant. Such bubbles often get their fuel from an increased money supply and unique historical contexts, like rapid technological expansion. A definitive characteristic of a bubble is irrational exuberance – the unfounded economic optimism that sees investors rallying around a particular asset class without a sound reason.
In the course of a bubble, investors push the price of an asset far beyond its intrinsic value. Like a snowball gaining mass and momentum, the bubble continues to grow. The higher the prices, the more speculators are drawn in, with the promise of future price appreciation pulling in even more investment, inflating the price further.
However, the party doesn’t last, of course. When prices crash, and demand dwindles, the bubble bursts, leaving those who joined late in the game to bear the brunt, with many losing a significant chunk of their investments. The fallout can be severe, with reduced spending by businesses and households and a potential economic downturn, or recession, looming large.
In the context of this article, asset bubbles can be tied to both the stock market bubble of the 1920s, the Dotcom boom of the early 2000s, and also the next entry on this list: the real estate bubble of 2000, which (in part) caused the global financial crisis of 2008.
The Financial Crisis (2008)
Events started in 1999 when, amidst a booming economy, the Federal National Mortgage Association (FNMA or Fannie Mae) sought to democratize the great American dream of homeownership. Their approach was to make home loans more accessible to those traditionally viewed as high-risk borrowers, known as subprime borrowers, who typically possessed lower credit ratings and had less money for down payments.
These subprime borrowers were offered mortgage products tailored to their risk profiles. This often included high-interest rates and variable payment schedules that could adjust dramatically over time. This significant shift in the mortgage industry marked the inception of the subprime mortgage boom.
The increased availability of mortgage debt struck a chord with two key demographics: previously ineligible borrowers, who suddenly saw the path to homeownership within their reach, and investors, who spotted lucrative opportunities within these riskier mortgage products. This demand from both ends ignited an explosive growth in mortgage originations and, by extension, a surge in home sales.
Simultaneously, the sense of prosperity incited consumers, many of them new homeowners, to take on additional debt to finance other consumer goods and lifestyle enhancements. Corporations, sensing opportunity in the booming economy, also leveraged themselves heavily, hoping to capitalize on what appeared to be a perpetual upswing. Financial institutions followed suit, using cheap debt to inflate the returns on their investments, creating a precarious pyramid of debt and speculation.
This high-wire act began to wobble in March 2007, when investment bank Bear Stearns found itself unable to cover losses linked to the failing subprime mortgages. Although Bear Stearns’ crisis alone wasn’t enough to trigger an immediate stock market crash—the Dow Jones even rose to 14,164 points on Oct. 9, 2007—it signaled the fraying edges of the financial fabric.
The financial crisis snowballed, and by September 2008, the major stock indexes had suffered almost a 20% drop in value. The cascading collapse continued unabated until March 6, 2009, when the Dow hit its lowest point— a chilling 54% below its peak. The recovery was long and grueling, taking four years for the Dow to regain its losses and reach its pre-crash levels, marking one of the most devastating periods in financial history.
This underscores the potential dangers of systemic risk, highlighting the importance of regulatory oversight, and serves as a stark reminder of the impact of financial imprudence on the global economy.
Coronavirus Crash (2020)
Market crashes became a worrying issue once again in 2020 as the COVID-19 pandemic swept across the globe. Wall Street, often seen as the leader of global finance, reeled under the impact of the burgeoning health crisis, with stock prices plunging dramatically. The week of Feb. 24 saw the Dow Jones and S&P 500 tumble by 11% and 12%, respectively, marking the steepest weekly stock market declines since the harrowing days of the 2008 financial crisis.
The relentless onslaught of the pandemic-induced market decline continued unabated into March. On the 12th, the Dow suffered a staggering 9.99% loss, its largest single-day drop since the Black Monday crash of 1987. Yet, the worst was still to come. On March 16, the index plunged even deeper, hemorrhaging 12.9% of its value. The financial landscape was eerily reminiscent of past market crashes, stoking fears of prolonged economic distress.
However, unlike previous financial tumults where recovery was a drawn-out affair spanning years, the 2020 stock market crash took a markedly different trajectory. Miraculously, by May 2020, the market had rebounded to its pre-pandemic peak, a testament to the resilience of modern economies in the face of unprecedented adversity.
Key to this swift recovery was the colossal wave of stimulus money unleashed by the Federal Reserve and Congress. The Federal Reserve wielded its monetary policy tools with determination, slashing interest rates to near-zero levels and injecting a colossal $1.5 trillion into money markets. Simultaneously, Congress rolled out a staggering $2.2 trillion aid package at the end of March, the largest such relief effort in U.S. history.
This coordinated financial onslaught provided a critical lifeline to ailing businesses and households, propping up the economy and helping to avert a more profound and enduring financial catastrophe. The 2020 crash provides an alarming reminder of how sudden and steep market declines can be, but also how hardened and adept modern financial systems have become in managing such crises.
Should You Fear a Stock Market Crash?
This brings us neatly to an appropriate question: are there any reasons to be afraid of a stock market collapse, assuming you are committed?
In a word, no, there is very little point or need in worrying too much about stock market crashes. As mentioned earlier, stock market crashes are incredibly difficult to predict, with the rare exception of the dot-com boom (and bust) of the early millennium. Given the ease in which funding was thrown around so easily during this time, it seems quite obvious (at least, in hindsight) that there would be some measure of consequence.
However, one thing that all of these crashes have in common is that they have nothing in common. As you can see, the reasons for a stock market crashing are wildly varied, and stock markets have a habit of catching us all off guard when we least expect it. To that end, being fearful of a stock market crash is a futile endeavor. The better question would be how to deal with stock market prices when they crash.
How to Respond When the Stock Market Crashes?
Crashing stock markets and the bear markets that precede them are inevitable in investing. Instead of intricate hedging strategies requiring advanced finance knowledge, retail investors could potentially see these downturns as an opportunity – a chance to buy stocks at a discount.
However, it is essential to devise a solid investment strategy beforehand. Incorporate the possibility of crashes and bear markets into your plan. Ask yourself: Is my portfolio crisis-resistant? Will I want to keep my current stocks during a crash? Is it prepared for a decade-long bear market?
Ultimately, maintaining a sustainable strategy throughout market ups and downs is key. Lessen your focus on daily price changes, invest in knowledge, and prepare for inevitable crashes. Long-term value investing, for instance, can help withstand Wall Street dramas and come out strong.
ith a steadfast ally by your side. Take this step today, embracing a journey marked by growth, stability, and foresighted planning, creating a financial narrative that is both promising and secure.
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Bottom Line
As evident with previous crashes, there are a wide range of reasons why a stock market crash occurs, none of which are predictable to any real degree. In fact, their unpredictability is the only predictable thing about them. They’re a fact of the financial life cycle and will happen now and again.
Either way, we should worry less about the causes and more about how we respond. As investors, we should acknowledge these cycles and adapt our strategies accordingly. Staying well-informed, maintaining a diverse portfolio, and adhering to long-term investment principles can help weather these inevitable market storms.