Stock market crashes, like the one in October 1929, don't single-handedly cause depressions, but they often expose weaknesses in the economy.
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Stock market crashes can leave positive legacies in their wake — even though they cause plenty of immediate pain.
In the US, stock market crashes led to the creation of the Federal Reserve System, the SEC, and the FDIC.
While the triggers for stock market crashes vary, the ultimate outcome is always the same: the market recovers.
Three little words strike more fear into investors' hearts than anything else: stock market crash.
It's not just that they mean losses (another word that scares investors). It's also that no one knows for sure when a stock market crash is going to happen — though the signs were often there in retrospect — or even exactly what it is. There's no one official definition.
Generally, though a stock market crash is seen as a single trading day in which a stock exchange/market drops by at least 10%. But it can also be "anytime there's suddenly a lot of volatility that makes you wonder whether the world is coming to an end tomorrow," says Terry Marsh, a finance professor emeritus at Haas School of Business at the University of California Berkeley.
Here's a summary of eight of the most notable stock market crashes in history, their causes, and their fallout. Unless otherwise noted, they occurred on US exchanges, though the effect often spread to other countries.
The economic damage caused by the 1907 Panic led to the founding of the Federal Reserve, and more government oversight of the financial markets.
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1. The Panic of 1907
What happened: A group of investors borrowed money from banks to finance an effort to corner shares of United Copper Company. UCC went bust under the weight of speculation, and then other firms followed: Stocks lost 15% to 20% of their value. Public confidence in banks fell and depositors rushed to withdraw their money, causing ruinous runs.
The damage: Some banks and stock brokerages failed, and many top executives at surviving financial institutions either resigned or were fired. Businesses couldn't get bank loans, causing them to fail.
What resulted: "We learned that when more than one financial institution is in trouble,someone must inject liquidity" into the system, says Carola Frydman, a finance professor at Kellogg School of Management at Northwestern University. At the time, private financier J.P. Morgan put together a rescue package that finally restored order on the exchanges. Realizing how economically significant the stock market had become, however, the US government created the Federal Reserve System to formulate monetary policy and provide emergency funds in crises.
2. Wall Street Crash of 1929
What happened: For nearly a decade, the stock market had kept rising in a speculative spiral. Overproduction in factories and a Roaring 20s giddiness led consumers to take on too much debt and believe financial instruments would climb perpetually higher. Finally, catching on to the overheated situation, seasoned investors began cashing out. Stock prices dropped first on the 24th, briefly rallied — and then went into free fall on October 28-29. The Dow Jones Industrial Average dropped 25% in those days in an event known as Black Tuesday. Ultimately, the market lost 85% of its value.
The damage: The Crash of 1929 didn't cause the ensuing Great Depression, but it served as a wake-up call to massive underlying economic problems and exacerbated them. A panicked rush to withdraw money caused overextended banks to fail, depriving depositors of their savings. Deprived of lenders, businesses began to collapse, leading to scarcities of goods. As many as 25% of Americans ended up jobless, spurring foreclosures, migration, and demoralizing poverty. Gross domestic production (GDP) dropped 30%. The economic woe spread overseas, hitting Europe particularly hard.
What resulted: A slew of reforms and new legislation. They included the Glass Steagall Act of 1933, which separated retail banking from investment banking — and led to the creation of the Federal Deposit Insurance Corporation (FDIC) to insure bank depositor funds. The National Industrial Recovery Act was passed to promote stable growth and fair competition, and the Securities and Exchange Commission (SEC) was established to oversee the stock market and protect investors from fraudulent practices.
New, untried automated trading programs escalated stock-price drops, leading to a crash in 1987.
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3. 'Black Monday' Crash of 1987
What happened: Sinking oil prices and US-Iran tensions had turned the market pessimistic. But what led to the wipeout on October 19 — eerily close to the 58th anniversary of the 1929 crash — was the relatively new prevalence of computerized trading programs that allowed brokers to place bigger and faster orders. Unfortunately, they also made it difficult to stop trades soon enough once prices started to plummet. Ultimately, The Dow and S&P 500 each dropped more than 20% and Nasdaq lost 11%. International stock exchanges also tumbled.
The damage: Fortunately, the crash didn't cause a recession or hardship. Trader Blair Hull helped set things right by putting in a large order for options at the Chicago Board Options Exchange on Black Monday. The main casualty of the crash was consumer confidence. It was essentially a computer-IT "plumbing problem" that "scared people," says Marsh.
What resulted: The financial community realized how stock exchanges around the world were interconnected. The SEC implemented circuit breakers, also known as trading curbs, to halt trading for the day once a stock exchange declines by a given amount. To ensure liquidity, then-Federal Reserve Chairman Alan Greenspan ensured credit was available and made it clear that "the Fed has your back," says Marc Chandler, a chief market strategist at Bannockburn Global Forex.
4. Japanese Asset Bubble Burst of 1992
What happened: Japan's real estate and stock markets had flown to unprecedented heights in the 1980s. At first backed by fundamental economic growth, the spiral had become speculative by the decade's end. In 1992, the bubble of inflated real estate and stock prices finally burst.
The damage: The Nikkei index fell by nearly half, setting in motion a minor, slow-moving Japanese recession. There were never mass business closures — though "high-end restaurants didn't do as much business," says Marsh — but not much growth either. US investors weren't hurt badly because they typically had only small amounts of Japanese stocks in their portfolios. Japanese investors, however, never fully regained their confidence in the stock market.
What resulted: The Japanese government placed subtle controls on its financial system. "Still, it took decades for the Japanese [stock] market to recover," says Tyler Muir, an associate professor of finance at UCLA Anderson School of Management. The economy too: In fact, the 1990s are dubbed "The Lost Decade" in Japan.
A collapse in the value of the Thai bhat caused economic chaos throughout southeast Asia in the late 1990s.
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5. Asia Financial Crash of 1997
What happened: Under pressure because the country borrowed too many US dollars, Thailand saw its baht currency collapse on July 2, 1997, declining 20% in value, and spurring debt and defaults that sent a ripple effect throughout several Asian financial systems.
The damage: Currency in other Asian countries, including Malaysia and Indonesia, tumbled as well. "In South Korea, women were giving the government their gold rings to melt down" and make into ingots for international sale to help a suddenly bankrupt nation pay off its debt, says Chandler.
What resulted: "East Asia got the lesson to self-insure" after the International Monetary Fund imposed tough measures in exchange for financial relief, says Marsh. And the crash raised awareness of the interconnectedness of regional financial markets and economies.
6. Dot-Com Bubble Burst of 2000
What happened: In the 1990s, with the internet revolutionizing professional and personal life, stocks in companies with ".com" after their names surged. Twelve large-cap stocks rose more than 1,000%; one, chipmaker Qualcomm, saw its stock increase more than 2,500%. Investors gobbled up shares of tech IPOs but seemed unaware that not every company tied to the World Wide Web could sustain its growth — or even had a viable business plan. "A new economy was being born and it was hard to place a value on it," Chandler says. But finally, people did — aided by some tighter money policies imposed by the Federal Reserve. They started to sell. By October 2002, the tech-heavy Nasdaq had fallen more than 75% from its March 2000 crescendo of 5,048.62.
The damage: Pets.com, Toys.com, and WebVan.com went out of business, along with numerous other internet companies large and small. Even larger, blue-chip tech companies suffered.
What resulted: Along with revealing that many tech startups had no clothes, "the overall downturn also exposed things that otherwise would have stayed hidden" in other firms, like accounting irregularities, says Muir. The Sarbanes-Oxley Act of 2002 was established to protect investors from corporate fraud. And "a lot of broker-dealers probably did more due diligence before they put more money into any internet funds," says Marsh.
When venerable firm Lehman Brothers went bankrupt in 2008, it further panicked a stock market already shaken by the bursting of the real estate bubble.
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7. Subprime Mortgage Crisis of 2007-08
What happened: At the turn of the 21st century, real estate was hot. Hungry for commissions, lenders practically gave money to under-qualified homebuyers. Investors bought up mortgage-backed securities and other new investments based on these "subprime" loans. Eventually, though, the inevitable happened: Burdened by debt, borrowers began to default, property prices fell, the investments based on them dived in value. Wall Street noticed, and in 2008 the stock market started to decline. By early September, it was down almost 20%. On Sept. 15, the Dow Jones Industrial Average dropped nearly 500 points.
The damage: Financial giants that had invested heavily in real estate securities, including venerable firms Bear Stearns and Lehman Brothers, failed. Businesses couldn't get loans because banks "didn't know who to trust," says Muir. Unemployment approached 10%. The misery spread overseas, where the Nikkei dropped almost 10% on October 8, 2008. The US entered the Great Recession, which officially lasted until 2009, though economic recovery remained sluggish for years.
What resulted: Through the Troubled Asset Relief Program, or TARP, the federal government rescued hobbled financial institutions; it also assumed control of other agencies, like troubled mortgage-market-makers Fannie Mae and Freddie Mac. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 regulated swaps and other exotic investments for the first time and led to the creation of the Consumer Financial Protection Bureau.
8. The COVID-19 Crash of 2020
What happened: By the beginning of 2020, COVID-19 had spread widely in China and then to Europe — notably Italy — and to the US, where restaurants and nonessential stores closed to stem the tide of infection.
As investors realized the extent to which the coronavirus could spread and negatively affect the economy, the stock market began to quiver. On March 16, with mandatory lockdowns being announced, the Dow Jones Industrial Average lost nearly 13% and the S&P 500 dropped 12%.
The damage: Struggling businesses furloughed or laid-off workers and some shuttered forever. Restaurants were limited to deliveries only and then partial-capacity table service. Travel restrictions kneecapped the airline and hotel industry. The human loss of the COVID pandemic has been devastating, with more than 300,000 deaths in the US and 1.5 million worldwide. As of September 2020, more than 31 million people were either unemployed or lived with an unemployed family member, according to the Center on Budget and Policy Priorities.
What resulted: The CARES Act of 2020 allowed extended unemployment payments, and government stimulus funds helped Americans stay afloat. The stock market bounced back as e-commerce companies like Amazon, makers of personal protection equipment, and pharmaceutical companies surged in value. Many businesses whose employees worked remotely during the COVID crisis said they would continue a similar arrangement once the pandemic passes, but "it remains to be seen whether it's a permanent shift," says Muir.
Stock market crash FAQ
What happens when a stock market crashes?
When a stock market crashes, the impact can vary. Sometimes, it's limited. For example, on Oct. 19, 1987, after five years in a strong bull market, the Dow Jones Industrial Average (DJIA) and S&P 500 both dropped more than 20%, following markets throughout Asia and across Europe. The crash was short and markets quickly recovered. Within a few days, the DJIA regained more than 43% of the points it lost and within nearly two years the market had recovered almost 100%.
At other times, the effects are widespread and longer-lasting. The most notorious example is the Crash of 1929. Stock prices dropped first on Oct. 24th, briefly rallied — and then went into free fall on Oct. 28-29. Ultimately, the market lost 85% of its value. Though not the sole cause, this crash was one of the contributing factors of the Great Depression, the worst economic period in American history, lasting nearly 10 years.
What causes a stock market crash?
Historically, stock market crashes often occur after a long period of economic and market growth. Confidence in the economy, steady stock gains, and low unemployment are all drivers of bull markets, as these sustained rallies are known. But prices can't keep rising indefinitely, and bull markets can only last for so long. Sometimes it's a general shift in sentiment, as in 1929, but usually, some precipitating event occurs.
Numerous things can cause a stock market to crash, including:
Panic
Natural or man-made disasters
Economic crises
Speculation
Can a stock market crash be prevented?
There really is no way to prevent the stock market from crashing. However, governments have added safeguards to prevent severe drops and upsets in market stability. One such tactic is the circuit breaker, instituted after the 1987 crash. If the S&P 500 Index experiences a drop of 7% or more over the previous day, trading in all US stock markets is halted.
Large amounts of stocks might also be purchased by private investors to try and stabilize a market. In fact, that used to be quite effective a century ago, shortening the Panics of 1873 and 1907. The government itself can step in, lowering interest rates to encourage investors to borrow and buy. But even with these mitigating factors, crashes still happen.
What should you do if the stock market crashes?
If the stock market crashes, don't panic and sell out. Remember that crashes can be short-lived, and prices may quickly rebound. This is especially important for older folks who are looking to live on their investment income or capital gains and may not have time to recoup their losses before needing that money.
One advance strategy is to ensure that you have a strong mix of defensive stocks in your portfolio. These are securities that are much less influenced by disruptions in the market and tend to be in industries considered to be essential, such as utilities and food. Or, you may want to place some of your savings in a safer financial product that can still earn money, like CDs or bonds.
What is a stock market correction?
A stock market correction is not quite a crash It's a brief dip of 10% to 20% in the market or individual stock that occurs to correct artificially inflated stock prices and unsustainable growth. They typically last a few months, although some last only a few days.
A stock market correction can occur for a number of reasons. Many investors chase market trends, so if people are buying a stock because they believe it will rise in value, others are likely to follow suit. This causes the price of that stock to rise. As this happens, some investors who hold that stock may begin to sell in order to turn a profit while the price is high, as will others, causing the stock price to dip temporarily.
This can happen on a larger scale as confidence in the market waxes and wanes. Good news can artificially inflate stock prices, and sometimes the market reaches a point when demand for stocks goes down, forcing investors who want to sell to lower prices.
Unlike a bear market, stock market corrections are often short and usually work themselves out. Corrections last around four months on average.
Still, there's no way to say for certain how long or short it will be. Market corrections are never the same and may even turn into a bear market, which lasts for a much longer period of time.
The bottom line on stock market crashes
Many of the above examples demonstrate how disasters that strike stock exchanges can leave positive legacies in their wake — even though they cause plenty of immediate pain.
Some stock market crashes maul economies for years. Others merely shake up investor confidence, making people more cautious in their choices. They can cause human tragedies and result in game-changing government reforms.
While the triggering events for stock crashes vary — involving everything from copper-mania to condo prices — the ultimate outcome has always been the same: The market recovers.
5.31% annual percentage yield (APY) is accurate as of 7/11/2024 and subject to change at the Bank’s discretion. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Accurate as of the time of publication. The national average rate referenced is from the FDIC’s published National Rates and Rate Caps for Savings deposit products, accurate as of 8/19/2024. See the FDIC website for more information. https://www.fdic.gov/resources/bankers/national-rates/index.html