While the warning signals of a stock market collapse are usually apparent in hindsight, no one can predict when one will occur or even define it precisely. Crashes in the stock market are rare, but they change our financial lives forever when they happen.
What Is a Stock Market Crash?
There is no generally accepted definition of what a stock market crash is. However, many agree that a stock market crash happens when the value of a stock exchange or market falls by at least 10%, usually within a single trading day or for several days. In a stock market crash, market prices fall sharply throughout a large portion of the market, causing “a lot of volatility that makes you worry if the world is coming to an end tomorrow.”
What Causes a Stock Market Crash?
External economic factors interact with crowd psychology to cause a stock market collapse. In other words, a stock market crash is caused mainly by a sudden drop in stock prices and panic. When panic sets in, selling by some market participants cause additional market participants to sell. A typical stock market crash often involves four elements:
- an extended period of increasing stock prices (a bull market)
- excessive economic confidence,
- a market where price-earnings ratios surpass long-term norms,
- and widespread usage of margin debt and leverage.
Natural catastrophes in economically productive regions, wars and large-scale corporate hacking, pandemics, changes to federal laws and regulations, and other factors may substantially influence a stock market crash.
Bear Market vs. Stock Market Crash
Despite the common association, crashes and bear markets do not always happen together. The characteristics of panic selling and a steep drop in prices differentiate stock market crashes from bear markets. Bear markets refer to seasons of falling stock market prices that last for months or even years. For instance, the 1987 Black Monday did not trigger a market crash. Similarly, the bubble in the value of Japanese assets gradually deflated over many years rather than a single sharp decline.
10 Biggest Stock Market Crash in History
From the earliest to the latest, the following is a brief overview of history’s ten major stock market crashes, highlighting the causes, consequences, and aftermath.
1. Panic of 1901
Recovery period: 3-4 years
The panic of 1901 is the first stock market crash on the New York Stock Exchange. It is famously dubbed “the rich man’s panic.”
- Trigger: Financial power conflicts over the Northern Pacific Railway between E. H. Harriman, Jacob Schiff, and J. P. Morgan/James J. Hill contributed to the market catastrophe. Panic ensued as the market plummeted on the afternoon of May 8. Investors could not anticipate the upcoming market downturn, but it was already evident by 1 pm. The death of J.P. Morgan broker Arthur Housman was rumored among traders just as the selling began.
- Consequence: The stock price of Burlington first began to fall. After being strong throughout the morning, there was an abrupt drop. The value of equities like St. Paul, Missouri Pacific, and Union Pacific started to decline. It didn’t take long for the whole marketplace to be submerged. Stocks were being dumped by investors who had previously been quite patient. A widespread outcry of “Sell! Sell! Sell!” echoed throughout the New York Stock Exchange floor as others followed suit. The panic caused the loss of thousands of small investors.
- Aftermath: Following the crash, Harriman and Hill formed the Northern Securities Company as a holding company to manage the Northern Pacific, the Great Northern, and Burlington.
2. Panic of 1907
Recovery period: 13+ months
The Panic of 1907 is the 8th largest decline in U.S stock market history. It is also known as the 1907 Bankers’ Panic or Knickerbocker Crisis. Beginning in mid-October, the New York Stock Exchange saw a steep decline of about 50% from its high the previous year, triggering the financial crisis known as the Panic of 1907.
- Trigger: Some investors borrowed money from financial institutions in a failed attempt to acquire a controlling stake in the United Copper Company (UCC). Stocks dropped by 15% to 20% when UCC collapsed under the weight of speculation and was quickly followed by other companies. When people lost faith in the banking system, they hurried to withdraw their money, triggering disastrous “runs on the bank.”
- Consequence: Numerous senior executives at still-standing banks and stock brokerages quit or were let go. Banks were unwilling to provide money; therefore, many businesses went down.
- Aftermath: Financial expert J. P. Morgan stepped in to prevent the panic from spreading by pledging enormous amounts of his own money and convincing other New York bankers to do the same. The Federal Reserve System was founded the year after Republican leader Senator Nelson W. Aldrich organized and headed a committee to explore the situation and recommend future remedies.
3. Wall Street Crash, 1929
Recovery period: 25 years
The crash on Wall Street in 1929 is also known as the Great Crash. Considering the impact, it represents the worst economic decline in the history of the U.S. stock market. The Great Crash is widely associated with October 24th, 1929, known as Black Thursday, and October 29th, 1929, known as Black Tuesday. Black Thursday is the day of the largest share sales in U.S. history. Black Tuesday refers to the day when about 16 million shares were traded on the NYSE in a single day, causing the Dow Jones Industrial Average to plummet by 25%. According to many sources, the Wall Street Crash paved the way for America’s Great Depression of the 1930s.
- Trigger: The stock market had enjoyed its speculative upward spiral for over ten years. During the “Roaring Twenties,” factory overproduction and the giddiness of the era led to excessive consumer debt and the false expectation that the value of financial assets would continue to rise indefinitely. With the use of margin loans, many private individuals and investment companies were paying as little as 10% of a stock’s worth upfront to purchase it. Veteran investors started taking their money out of the market as they realized the situation had become too hot. The market collapsed on the 24th, had a minor recovery on the 25th, and then plunged again on the 28th and 29th of October. The market lost 85% of its value in the end.
- Consequence: The Great Depression was not directly caused by the Crash of 1929; instead, it was a symptom of far deeper structural flaws in the economy. Overextended banks failed as depositors rushed to withdraw their money, leaving many people without access to their life savings. Without access to capital, failing companies triggered a widespread collapse in production and distribution, resulting in severe shortages. Twenty-five percent of the workforce was rendered unemployed, leading to homelessness, mass migration, and dismal poverty. We saw a 30% decline in GDP. The international financial crisis affected Europe severely.
- Aftermath: That led to a wave of changes and brand-new laws. One of them was the Glass Steagall Act of 1933, which led to the formation of the FDIC to protect bank depositors’ money by separating retail banking from investment banking. The Securities and Exchange Commission (SEC) was set up to monitor the stock market and protect investors from unscrupulous activities. The National Industrial Recovery Act was created to encourage steady development and fair competition.
4. Stock Market Crash, 1973-1974
Recovery period: 2+ years
From January 1973 through December 1974, the stock market was in a bear market due to the crash of 1973-1974. It was one of the greatest stock market downturns since the Great Depression, affecting all global stock markets, especially the United Kingdom.
- Trigger: The collapse occurred two years after the Bretton Woods system failed, bringing with it the “Nixon Shock” and a devaluation of the US dollar under the Smithsonian Agreement. The onset of the 1973 oil crisis in October only made things worse. The incident marked a turning point in the economic downturn of the 1970s.
- Consequence: Between September and December 1974, all the major stock indexes of the eventual G7 hit rock bottom, losing at least 34% in nominal terms and 43% in real terms.
- Aftermath: The road to recovery was long and winding in every instance. Although West Germany’s market recovered quickly, reaching its pre-crash nominal level again in only eighteen months, its actual level reached its pre-crisis high in June 1985. May 1987 (only a few months before the Black Monday catastrophe) was the earliest the UK market recovered to its pre-crash level. August 1993 (nearly twenty years after the 1973-1974 crisis) was the earliest the US market recovered to its pre-crash level in real terms.
5. Black Monday, 1987
Recovery period: 2+ years
Black Monday occurred on October 19, disturbingly close to the 58th anniversary of the 1929 crash. Due to the time difference, the day is known as Black Tuesday in Australia and New Zealand. Twenty-three of the world’s largest stock markets all dropped significantly in October 1987.
- Trigger: New, untested computerized trading technologies exacerbated the 1987 stock market crisis. The relatively new prominence of computerized trading systems enabled brokers to place larger and quicker orders causing the wipeout on October 19. When prices began to fall, they also made it impossible to halt trading quickly enough to prevent more losses. Also, the market had become pessimistic due to falling oil prices and heightened tensions between the US and Iran. Another factor was the widening U.S. trade deficit. All three combined to trigger the Black Monday crash, 1987.
- Consequence: Dow and S&P 500 fell by almost 20%, while Nasdaq shed 11%. The global stock markets also fell. Consumer confidence was the biggest victim of the catastrophe. Nineteen of the world’s 23 leading industrial powers had 20% or more declines. It was projected that losses around the globe totaled $1.71 trillion. The magnitude of the catastrophe caused many to worry about a prolonged period of economic instability or possibly a recurrence of the Great Depression.
- Aftermath: After Black Monday, regulators developed new rules known as trading curbs. For instance, after a stock market falls by a certain amount, trade is temporarily halted until the market recovers (a practice known as “circuit breaking”). This practice was made mandatory by the Securities and Exchange Commission. Because of Black Monday, the world’s financial community learned about the interconnectedness of stock markets. Most of these trading curbs were implemented for the first time during the stock market crisis of 2020.
6. Japanese Asset Price Bubble, 1992
Recovery period: 20+ years
In Japan, the decade after 1992 is known as the Lost Decade because of the slow-moving impacts of the asset bubble collapse. Since Japan’s GDP in 2017 was just 2.6% greater than it had been in 1997, with an annualized growth rate of 0.13%, the “lost decade” finally became the “lost 20 years.”
- Trigger: It all started in the 1980s when the Japanese stock market and real estate reached new heights never seen before. The economic development that first fueled the spiral eventually led to speculation by the decade’s close. The overheated real estate and stock market bubble burst in 1992.
- Consequence: A near-50 percent drop in the Nikkei index triggered Japan’s mild, sluggish recession. Although no major businesses ever shut down during this time, growth was also minimal. Most American investors only held a modest percentage of their portfolios in Japanese equities; therefore, they were mostly unaffected. However, trust in the Japanese stock market was never entirely restored.
- Aftermath: This led the Japanese government to institute several relatively unobtrusive curbs on the country’s financial sector.
7. Asia Financial Crisis, 1997
Recovery period: 2 years
In the late 1990s, economic turmoil swept over most of East Asia and Southeast Asia starting in July 1997, as the value of the Thai bhat plummeted. The crisis started in Thailand, known as the Tom Yam Kung crisis. Because of the IMF’s participation, “IMF Crisis” has become a common way of referring to the Asian Financial Crisis among nations that were touched by it.
- Trigger: On July 2, 1997, the Thai baht currency collapsed under the weight of the country’s excessive US dollar borrowing. The baht fell in value by 20%, causing a cascade of debt and defaults across many Asian financial institutions.
- Consequence: As a result, currencies throughout Asia, particularly Malaysia and Indonesia, fell precipitously. In addition, according to reports, “women in South Korea were handing the government their gold rings to melt down” and converting them into ingots for worldwide sale to assist the country in paying off its debt. The crash stoked fears of a global economic collapse due to financial contagion. Also, international investors’ reluctance to lend to developing nations in the wake of the Asian crisis slowed economies throughout the developing world.
- Aftermath: As the nations going through a meltdown were among the wealthiest in the world, and as hundreds of billions of dollars were at risk, any reaction to the crisis was likely to be cooperative and worldwide. Fortunately, there was a speedy rebound in 1998–1999, and fears of a collapse were quickly allayed. To help the worst-affected economies avoid default, the International Monetary Fund (IMF) crafted a series of bailouts (also known as “rescue packages”) that were contingent on changes to the countries’ currencies, banking systems, and financial regulatory frameworks. Also, Japan, China, and South Korea are just a few countries that learned from the crash and began amassing foreign currency reserves as a defense mechanism against future assaults.
8. Dot-Com Bubble, 2000
Recovery period: 15 years
The dot-com bubble is also known as the dot-com boom, the tech bubble, or the Internet bubble. During the boom, individuals invested at record levels, and tales of people leaving stable employment to pursue stock trading were common. Stocks in 12 major companies increased by over 1,000%, with chipmaker Qualcomm’s shares increasing by almost 2,500%.
- Trigger: The dot-com bubble resulted from a major over-evaluation of tech companies in the late 1990s. As the internet began to affect every aspect of people’s lives, particularly in the 1990s, the value of “dot com” firms skyrocketed. Investors scooped up shares of tech IPOs, seemingly oblivious that not every firm with ties to the Internet can continue its development or even has a sound business model. During the height of the boom, a prospective dot-com firm might become a public company through an IPO and receive considerable money even if it had never earned a profit or, in some circumstances, realized any major income. The resulting stock market bubble popped when the Federal Reserve restricted capital flow.
- Consequence: The Nasdaq Composite Index, made up mostly of technology companies, saw its first significant decline since its inception. The rise of the Nasdaq from 1995 to 2000 was almost 500%. However, the index had dropped by about 78% by 2002, and it took nearly 15 years to recover to its pre-crash level. Tech businesses of all sizes were affected. Several major and small online businesses, including Pets.com, Toys.com, and WebVan.com, went out of business. Due to layoffs, a surplus of programmers entered the unemployed. The number of students enrolled in computer-related programs at universities fell significantly.
- Aftermath: Consolidation occurred in the technology industry as expansion stabilized. As a result, market leaders like Amazon.com, eBay, and Google emerged. Today, these companies in the technology industry are among the most valued on the stock market. Also the crash also uncovered things that otherwise would have been kept buried in other organizations, such as accounting problems. Protecting shareholders from corporate wrongdoing is a primary goal of the Sarbanes-Oxley Act of 2002. Additionally, many broker-dealers presumably undertook more due research before investing further in any online stock.
9. The Financial Crisis of 2007–2008
Recovery period: 17 months
The 2007–2008 financial crisis, sometimes known as the Global Financial Crisis (GFC), was a devastating economic downturn felt throughout the globe at the turn of the 21st century. Most severe financial crisis since the Great Depression (1929), more than $2 trillion was wiped out of the global economy, making it one of the top five worst financial disasters ever. In total, the market rebounded in about 17 months.
- Trigger: Real estate was a trendy commodity at the start of the millennium. Lenders were so eager to make commissions that they essentially lent money to people who weren’t eligible to purchase a property. “Subprime” loans became the basis for new assets, such as mortgage-backed securities, which investors eagerly purchased. Unfortunately, the inevitable did occur; borrowers started to fail on their debt loads, property values dropped, and investments dependent on them plummeted in value.
- Consequence: A stock market drop began in 2008. It had fallen over 20% by the beginning of September. The Dow Jones Industrial Average lost approximately 500 points on September 15th. Bear Stearns and Lehman Brothers, two once-mighty financial institutions, collapsed because of their massive exposure to real estate securities. Banks didn’t know who to trust, so they hesitated to lend money to businesses. The unemployment rate was close to 10%. In other countries, the Nikkei stock index plunged by over 10% on October 8, 2008, as the worldwide recession deepened. The Great Recession hit the United States, officially ending in 2009 but leaving economic recovery sluggish for years. The European debt crisis originated in a Greek deficit in late 2009, and the Icelandic financial crisis of 2008-2011 followed shortly afterward. The latter was the greatest economic collapse ever experienced by any nation in relation to its size of GDP. Some sources claim that the crisis led to rises in suicide, as well as decreased fertility.
- Aftermath: The federal government stepped in and took control of agencies like the struggling mortgage market makers Fannie Mae, Freddie Mac, and other financially troubled institutions through the Troubled Asset Relief Program (TARP). After the crisis, governments used huge bailouts of financial institutions, other palliatives, and fiscal measures to save the world’s financial system from collapsing. To “advance the financial stability of the United States,” lawmakers in 2010 passed the Dodd-Frank Wall Street Reform and Consumer Protection Act as a reaction to the crisis. In 2009, one of the longest and most profitable bull runs started, lasting until 2020.
10. COVID-19 Crash, 2020
Recovery period: 33+ days
After mounting instability due to the COVID-19 pandemic, financial markets throughout the globe plummeted unexpectedly on 20 February 2020. As of April 7, 2020, it was over.
- Trigger: By the beginning of the year 2020, COVID-19 had spread widely across China, Europe (especially Italy), and the United States, prompting the closure of restaurants and other non-essential businesses to stop the disease’s spread. The stock market started to tremble as investors understood the severity of the coronavirus’s potential to spread and badly impact the economy.
- Consequence: Several companies were forced to lay off employees, implement temporary closures, or go out of business entirely. The restaurants could only provide takeout and delivery, and eventually, just a fraction of their seating capacity could be used for dining in. The hotel and airline industries were impacted negatively by the travel restrictions. As of October 2022, over one million people have died in the United States due to the COVID epidemic. According to the Center on Budget and Policy Priorities, as of December 2020, nearly 30 million adult Americans were jobless and did not get enough to eat.
- Aftermath: Americans survived with the support of government programs and the CARES Act of 2020, which allowed for longer durations of unemployment benefits. In addition, companies involved in online retail, such as Amazon, and those involved in the production of personal safety gear and pharmaceuticals, saw their stock prices rise, helping restore investor confidence in the market. While several companies reported that their staff could work remotely during the COVID pandemic.
How to Prepare for a Stock Market Crash
The phrase “stock market collapse” is dreaded among investors. No one prays for it to happen. However, if history is anything to go by, preparing for a stock market crash is an intelligent move for an investor. You can take steps to fortify your finances in times of volatility and uncertainty.
- Settle your toxic debt – Toxic debt is defined as high-interest debt that exceeds an 8% ratio. Given the average yearly return on the stock market (about 8%), carrying more debt would result in a net loss. This class often includes things like credit cards and high-interest personal loans. You need a plan and a strategy to eliminate your toxic debt. You’ll be able to get your financial life in order and improve your credit score. If you haven’t already, you’ll be in an excellent position to begin saving for unexpected events.
- Establish a solid emergency fund account – Everyone needs a liquid monetary safety net in the event of an emergency, such as the loss of a job or an unexpectedly high expense. Some experts say 9-12 months of costs is ideal, while others say 3-6 months is more reasonable. A high-interest savings account is ideal for keeping your emergency funds.
- Manage your spending – Spending big money on a new TV or automobile during economic instability is a risk you may not want to take. Keep your money where you can easily access it, such as in an emergency fund and, if possible, investments in case of a recession.
- Ensure that your portfolio is diverse – Investing is the next best step after ensuring everything is in order, such as paying off high-interest debt and building up an emergency fund. When equities are discounted in a crash or bear market, many investors jump at the chance to buy. People of all ages may benefit from investing. Start investing as soon as possible. Financial experts recommend diversifying your holdings among hundreds, if not thousands, of different firms to create a secure portfolio. The best method to deal with a declining market is to stay the course, recall your financial goals, and stick to your plan.
FAQs About Stock Market Crashes
What is the October effect?
The October effect is the unfounded belief that stock markets perform poorly in October. However, as most data contradict the October effect, it is generally accepted that it is more of a psychological anticipation than an actual event.
What is the roaring twenties?
The decade after World War I, known as the “Roaring Twenties,” was prosperous and luxurious. With the promise of a better living in the rapidly expanding American industrial sector, many people from rural areas moved to the city during the decade after World War II.
Did the 1929 stock market crash cause the great depression?
The October 1929 stock market fall didn’t start the Great Depression alone but revealed its flaws.
Does a stock market crash have benefits?
Although they inflict much short-term suffering, stock market crashes may leave good legacies. For instance, the Federal Reserve, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation (FDIC) all came into existence due to stock market disasters in the United States. Also, despite the crash, the stock prices of companies that compete with the impacted companies may go up.