Jul 26, 2022
History will never forget the many stock market crashes in the last century. However, the memories will continue to linger because of the consequential economic effects they brought.
While there is no consensus as to when a stock market crash occurs, many experts believe it happens when the values of stock market indexes decline by 20% in a single day or more. The bear market panic causes massive sales of assets by investors wanting to mitigate further loss. Before examining the biggest crashes, we will briefly discuss how the stock market operates.
Various factors can contribute to the stock market crash. So, How do we identify a market crash?
The stock market has two possible movements; upward (bullish) and downwards (bearish). When the market goes upward, it implies more buying than selling during a particular session. When it moves downward, the reverse is the case.
There are Over 7,000 publicly traded companies, constantly going up and down. Since monitoring these stocks simultaneously is impossible, how can we tell the market’s direction?
Certain indexes track the market’s movements at every given moment. For instance, the S&P 500 tracks 500 of the largest companies in both markets in the US, while the Dow Jones Industrial Average follows 30 companies considered most important. We have a bear market if these two indexes are down by over 20%.
1929, the year that ushered in the great depression, will not be forgotten soon in America’s history. The plunge that started this year remains the worst the world has ever experienced. Before the dip began, the market thrived and rose to almost 600% in less than a decade.
Everything started going down spirally when the market experienced a moment of decline on the 3rd of September. Seeing it was unprecedented, investors panicked and sold off their stocks. On the 28th and 29th of October, the Dow further dropped by 13% and 12%, respectively. By 1932, 89% of the previous high recorded in 1929 was lost.
Many believe that the bull market, which caused an increase in margin investment, played a major role in the stock decline. Once investors spotted a bear market, they got out for fear of being unable to pay it back. Consequently, Dow did not bounce back until later in 1954.
History was made on the 19th of October 1987 when Dow drastically dropped by 22.6%. The decline persisted for weeks, so all indexes were down above 20% by November.
Although the precise cause of the crash is unknown, there were several pointers to what may have caused the crash. Some speculate that one of these factors was responsible; the devaluation of dollars, the growing trade deficit, the rise of algorithm-based computer trading, and the stock plunge in other countries.
Thankfully, the crash was short-lived as the market had begun to pick momentum later that November. In just two years, the Dow recovered all losses incurred.
The 90s ushered in the internet age, where we saw a massive increase in technological innovations. As a result, tech companies became overvalued because investors poured money into the sector. Many investors bought tech stocks assuming they would be the next big or Blue- Chip companies. As a result, the NASDAQ index, which mainly tracked tech companies, saw a surge of nearly 400% and reached its peak on the 10th of March, 2001.
However, everything came crashing when investors soon realized most of those companies were not as valuable as they seemed. By October 2001, the NASDAQ index was down by 77%. Consequently, it took them 15 years to fully recover and reach previous highs.
The crash of 2008 came because of the fed’s liberal lending guidelines. This increased the number of subprime loans given to intending home buyers who could not afford them.
Companies capitalized on this opportunity to make quick profits for themselves. Essentially, home debt increased, and people could not pay their mortgages. Therefore, the mortgage market collapsed, leading to a financial crisis.
The first warning sign of an impending doom erupted when a major investment bank declared bankruptcy for losses related to subprime mortgages. However, the market kept growing before hitting a peak in October 2007. Eventually, it came crashing, and by September of the following year, indexes had plummeted by 20%.
The market reached its lowest point by the 6th of March, 2009, going down by 54%. This crash was a slow collapse of the US financial system. Dow was not back up until four years after.
You are more likely to remember this vividly of all the stock market crashes we have examined. The stock market down spiral lasted from February to April, when it ceased. Due to uncertainties and restrictions, many investors sold assets out of panic. The airline and energy sectors were more severely affected.
On the 12th of March, during the peak of the crash, Dow declined by 9%, making it the single biggest daily drop since the 1987 black Monday. It fell by 12.9% four days later, beating its previous record. Likewise, the S&P 500 declined by 34% during this crash. Due to sudden decline, the NYSE halted trading on several occasions.
Theodore Roosevelt once said, “The more you know about the past, the better you are prepared for the future.”
From all that went down, we can learn that;
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