Biggest Stock Market Crashes in History

A stock market, share market, or equity market – whatever moniker one uses – is an aggregation of buyers and sellers of shares (also called stocks) which represent ownership claims on various businesses. These can include securities listed on a public stock exchange and stock that is only traded privately. Private stocks are shares of private companies which are sold to investors through equity crowdfunding platforms. Investment strategies drive investment in stocks.

Stock market trading is one of the most important ways for companies to raise additional financial capital for various business activities including expansion. While the price of the stock is associated with the company’s business investments and other economic activities. However, changes in stock prices are caused by external factors such as socioeconomic conditions, inflation, exchange rates, fiscal policy, and the political situation of a country.

What is a Stock Market Crash
The Biggest Stock Market Crashes
How to prepare for a Downturn
Conclusion

What is a Stock Market Crash

A sudden dramatic decline of stock prices across a major cross-section of a stock market resulting in a significant loss of paper wealth is defined as a stock market crash. While there is no numerical specification, the term is applied to a decline of 10% or more in a stock market index. It is a social phenomenon of external economic events combined with crowd psychology that drives participants to panic selling. Stock market crashes often follow speculation and economic bubbles. Some reasons that can drive stock market crashes are –

• Excessive economic optimism
• A prolonged period of rising stock prices
• Large corporate scams
• Wars
• Changes in federal laws and regulations
• Natural disasters
• Political disturbances

Naturally, stock market crashes are, generally, unexpected.

Niall Ferguson aptly stated - "Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash."

The Biggest Stock Market Crashes

As quickly and unexpectedly as a stock market crash can occur, its effects can be deep and long-lasting.  And history has noted some biggest crashes over the years.

2020 – The Covid-19 Crash

As the pandemic hit globally, governments across the world shut down entire economies to restrain the spread of the deadly virus. It caused an economic shock rattling investors. The financial markets recorded a loss of 34% between February and March 2020. The largest one-day drop since Black Monday of 1987 was on March 16, 2020, with a loss of 12.9%.

However, unlike other crashes in history, this one recovered quickly and the market regained its peak within 33 days – a historically fast turnaround. The quick recovery is also, partially, a result of the Federal treasury injecting USD 1.5 trillion into the financial markets and Congress passing a USD 2.2 trillion aid package. Despite the human cost due to the pandemic and the financial suffering of millions of people, the stock markets took an upward run. Valuations soared and companies recorded profits.

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2008 – The Mortgage Crisis

The foundation of this financial crisis was laid in 1999 by the Federal National Mortgage Association (FNMA). In a bid to make home loans more accessible, banks relaxed regulations and due diligence parameters and began lending money to people with low credit ratings and less money to spend on down payments. Their elevated risk profiles were evident in the mortgage repayment terms – such as high-interest rates and variable payment schedules. It fuelled an explosive growth in mortgage debt and home sales as previously ineligible borrowers and investors could now avail of loans. New homeowners were taking on additional debts to purchase other goods. Adding to this chaos were Financial Institutions using cheap debt to boost ROI and companies indebting themselves to capitalize on the opportunity of a surging economy.  

This debt-fuelled market began showing signs of an impending collapse in 2007. The foreclosure rate on residential homes was high as was the unemployment rate, which was increasing. It was a very specific trigger that caused the index to fall by 57% and took the global markets with it in September 2008.  

Recovery came in the form of government bailouts, fresh cash injections into the economy, and a historical lowering of interest rates. The global markets took close to 2 years to recover from this disaster.

2000 – The Dot Com Bubble

A bubble is caused by valuations that don’t match the company’s financial stability. It is spurred by eager investors trying to chase the next big thing. During the late 1990s, the valuation of internet-based companies rose sharply. Many investors speculated on the dot-com companies, even the ones without revenue or scalable business plans. Huge money was invested driving up the value of any internet-based company. Inevitably, the Federal Reserve tightened its monetary policy restricting capital flow and causing this dot-com bubble to burst. Nasdaq lost 77% of its market value after rising to 500% within a space of 5 years. By the turn of the century, the stock market was reeling from this crash which would take 15 years to recover.  

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1973 – The Oil Crisis and Economic Recession

This crash was a result of a series of events and, the worst, since the Great Depression of that time. There were financial reforms that included the unlinking of the dollar to gold. This caused instability of the dollar causing a runaway inflation. Parallelly, the economic recession was adding stress, and then, in 1973, the price of oil quadrupled due to the oil crisis. This sped up inflation. All these events, combined, created a market crash of 48%. It took 21 months for the markets to recover from this crash.

1929 – The Great Depression

Clocking a market crash of 89% which took 25 years to recover is, possibly, the worst stock market crash in history. It caused the Great Depression which would only recover in 1954. This crash ended the Roaring Twenties during which the economy expanded significantly. The Dow Jones market saw a sixfold increase between 1921 and 1929 up from 63 points to 381 points. Beginning a descent in early September of 1929 it accelerated during a two-day crash on October 28, 1929, and October 29, 1929, by 13% and 12% respectively. Within a month the Dow had lost half its value. It continued its loss for the next 3 years and bottomed out after losing 89% by the summer of 1932. This great loss is attributable to excessive leverage as investors began buying stock under margin loans. Consumers were adding to this by purchasing items on credit. When this debt bubble burst it caused the greatest economic crash in modern history.

How to prepare for a Downturn

Market downturns and unexpected crashes are a part of investing. Panic selling only adds to the loss, however, with a little patience, investments make up their losses with time. There are a few things that can be done to shore up finances during a period of volatility and uncertainty.

• Paying off high-interest debt
• Having a fully funded exclusive emergency fund to support for at least 6 months
• Curbing unnecessary and excessive spending habits
• Create a diversified investment portfolio

Conclusion

A market study of the biggest crashes in history provides valuable insights into how the financial markets behave to various catalysts and how perception can drive consumer mood. It is essential to, first, study the market, understand the risks, and then invest.

FAQs

What is a stock market crash?

A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market resulting in a significant loss of paper wealth.

What are the biggest stock market crashes in history?

The biggest stock market crashes in history are:

• 2020 – The Covid-19 Crash
• 2008 – The Mortgage Crisis
• 2000 – The Dot Com Bubble
• 1973 – The Oil Crisis and Economic Recession
• 1929 – The Great Depression

How can one be prepared for the downturns occurring in the stock market?

There are a few things that can be done to shore up finances while downturns occur in the stock market:

• Paying off high-interest debt
• Having a fully funded exclusive emergency fund to support for at least 6 months
• Curbing unnecessary and excessive spending habits
• Create a diversified investment portfolio