With the markets feeling so gloomy and bearish lately, I thought it would be a good time to look at history’s worst stock market crashes. After all, we all need to know that this will pass one day. However, there is another side to market crashes and corrections, no matter how much despair there is from investors. Remember that the S&P 500 has gained, on average, about 10% since its inception in 1957. This includes several notable market crashes and bubbles.
Table of Contents
- What Is a Market Crash?
- What Causes a Market Crash?
- Can Crashes Be Avoided?
- Circuit Breaker Triggers
- Worst Stock Market Crashes in History and Dark Pools
- Worst Stock Market Crashes in History
- Black Monday Stock Crash of 1929
- Worst Stock Market Crashes in History: Black Monday Stock Crash of 1987
- The Dot-Com Bubble: 1999-2000
- The Global Financial Crisis in 2008
- The Novel Coronavirus Crash in 2020
What Is a Market Crash?
Wait, so am I calling this current downturn a market crash? Not really.
The stock markets see an average correction of at least 10% every two years.
For those of us who have been through several of these, we know that the markets come out stronger on the other side!
So what is a market crash? Compared to a correction, a market crash is swift, sudden, and unexpected. Many of the infamous market crashes happened in a single session.
So far this year, the NASDAQ is down about 25%. First, think about how painful it has been to investors, then think about a 25% drop in a single day. That’s the difference between a market crash and a market correction.
What Causes a Market Crash?
As with any event on the stock market, there can be a number of different reasons as to why a crash happens. Each specific market crash throughout history has happened in a different market environment.
Macroeconomic factors, sector bubbles, and unexpected black swan events can all lead to a market crash. All you need to know is that there is nothing that you can do to prevent a market crash. Everyone is in the same boat!
Can Crashes Be Avoided?
Not really, no. But after previous market crashes, some have been a failsafe put into place to avoid a total market meltdown. We saw some of these during the meme stock short squeeze in 2021.
While that wasn’t a market crash, the trading volatility caused the New York Stock Exchange to halt trading for some stocks. In the case of a market crash, the entire market would be halted. So here are some things set in place to prevent a debilitating market crash!
Circuit Breaker Triggers
These are just a series of thresholds that would halt trading if they were breached.
These include if the S&P 500 index drops suddenly by a certain percentage.
It can be halted at three levels if the S&P 500 drops by 7%, 13%, and 20%.
Imagine if the S&P 500 fell 20% in one day. Another trigger is a market decline right after the opening bell or right before the closing bell.
The exact times are after 9:30 AM EST or before 3:25 PM EST. Finally, and thank goodness for this, trading is halted market-wide if the market ever falls by 20% in a single session.
Worst Stock Market Crashes in History and Dark Pools
Many investors don’t think of dark pool trading as a hedge against a market crash. These pools of trading were created in the 1980s by the SEC. If you don’t know dark pools, they are separate trading markets for institutional traders who trade large blocks of shares.
While dark pools have received some criticism from retail traders lately, they serve a purpose. The traded blocks are so big they could cause major damage to stock.
If too many of these happen simultaneously, it could trigger a cascading effect across the market. But, of course, you never know if it will be enough to cause a market crash one day. Luckily, we have dark pools to avoid this problem.
Worst Stock Market Crashes in History
I will focus on US market crashes here since it is much more relevant and close to home. This reminds us that markets worldwide, not just US markets, have also crashed. But for this article, I will talk about history’s most infamous US stock market crashes.
Black Monday Stock Crash of 1929
Of course, this was before either the S&P 500 or NASDAQ existed.
The Dow Jones Industrial Average was being used, though, and the blue-chip index fell by nearly 90% between 1929 and 1932.
I know I said that market crashes usually happen in a day or two, so let me explain.
The major crash occurred in October 1929 when the US stock market fell by 13% and 12% on consecutive days. These are now known as Black Monday and Black Tuesday.
The bearishness continued until the summer of 1932 when the Dow bottomed at 90% below its peak. Following this crash, the Dow did not reclaim its price level from 1929 until 1954.
This market crash was the leading catalyst of the Great Depression. The major cause? Over-leveraged traders created a debt bubble. Think of it as one gigantic margin call that crashed the market and devastated an economy.
Worst Stock Market Crashes in History: Black Monday Stock Crash of 1987
After 1954, things began to trend back up, and a new bull market was born. This is why they refer to the stock market as a cyclical machine. Once bearishness has subsided, bullishness takes back over, and vice versa. The stock market was great again until another Black Monday hit in 1987.
On Monday, October 19th, 1987, the Dow Jones dropped by 22% in a single session. It remains the single largest stock market decline in US history. Luckily for investors, this was more of a flash crash, and the market recovered by September 1989.
What caused this Black Monday? Errors in early computerized trading are the main suspect. But, as well there were rising geopolitical tensions in the Middle East as well as a growing US trade deficit.
The Dot-Com Bubble: 1999-2000
Now we’re talking. This is the crash that most people are comparing 2022’s correction to, although I’m afraid I have to disagree with that comparison.
The Dot-Com bubble is one of the worst markets crashes in history. In five years between 1995 and 2000, the NASDAQ grew from 1,000 to 5,000 basis points.
From March 2001 to October 2002, the NASDAQ fell by 76.8%!
The NASDAQ bottomed at 1,139 basis points, erasing nearly five years of gains. The reason? Overpriced and overvalued internet stocks. Anything with a dot-com on the company’s end was rising like crazy.
The NASDAQ index did not regain its previous highs for 15 years. So you can see why investors are so concerned about this recent NASDAQ correction.
The Global Financial Crisis in 2008
It’s still too soon; the wounds haven’t healed yet! Unfortunately, this situation is all too familiar for those who lived through the global financial crisis in 2008. But, of course, this crash was also brought on by a lot of leveraged borrowing, particularly with subprime mortgages.
To make homes more accessible to people with lower credit, Fannie Mae lowered the qualifications for mortgage applications. Well, the rest is history. We all know what happened next.
From 2007 to 2008, the major averages lost over 20% of their value. The Dow Jones hit its lowest price in 2009 when it was 54% below its previous highs.
It took until 2013 for the Dow to recover. This crash is infamous for the collapse of Bear Stearns and Lehman Brothers. It is also the inspiration for the movie The Big Short. The award-winning film is about Michael Burry shorting the US housing market.
This brings us to the present day, where the onset of the COVID-19 pandemic in the US has triggered markets to tumble. In the week of February 24th, 2021, the S&P 500 and the Dow Jones dropped by more than 11%, respectively.
On March 12th, the Dow fell by 10% in a single session, and then on March 16th, it beat that mark after falling by 12.9%. The craziest thing about the 2020 COVID-19 crash was that the markets recovered by May of the same year.
The injection of stimulus and lowering of interest rates led to one of the strongest bull markets in history. Is this correction in 2022? This is the fallout from that bull market.
So as you can see, market crashes happen pretty infrequently. However, market corrections happen much more often, which we dealt with in 2022. The key takeaway from every crash and correction is that the market eventually recovers.
Of course, nobody wants to wait several years or even decades for the markets to return to normal. So when will this correction in 2022 come to an end? Nobody can predict that. We know it will end one day, and when it does, the bulls will be back in control!