When a stock market experiences a crash, it is the effect of economic events spurring investors to act out of fear. These types of financial crises have appeared frequently throughout history.
In the United States, stock market crashes were documented as early as the 18th century and since then significant financial downturns have had a place in U.S. history.
- 1 What Was the Biggest Stock Market Crash of All Time?
- 2 Where Should You Invest Your Money to Prepare for a Crash?
- 3 Are Stock Market Crashes More Common During Certain Times of the Year?
- Stock market crashes often have a major economic impact and can take time for marketplaces to return to their pre-crash levels.
- The Dutch Tulip Bulb Market Bubble, also known as Tulipmania took place in 1637.
- The Financial Crisis of 1791 to 1792 was the first U.S. stock market crash preceded by the Crisis of 1772, which occurred in the 13 colonies.
- Oct. 19, 1987, also known as Black Monday, marked the largest one-day stock market decline in history.
- The 2020 Coronavirus Stock Market Crash lasted several months.
What Is a Stock Market Crash?
The term stock market crash refers to a sudden and substantial drop in stock prices. Stock market crashes are often the result of several economic factors, including speculation, panic selling, or economic bubbles, and they may occur amid the fallout of an economic crisis or major catastrophic event.
While there is no official threshold for what qualifies as a stock market crash, a common standard is a rapid double-digit percentage decline in a stock index, such as the Standard & Poor’s 500 Index or Dow Jones Industrial Average (DJIA), over a period of several days.
There are measures in place to help prevent a stock market crash, such as trading curbs, or circuit breakers that can halt any trading activity for a specific period following a sudden decline in stock prices.
Early U.S. Stock Market Crashes
The first U.S. stock market crash took place in March of 1792. Before the Financial Crisis of 1791 to 1792, the Bank of the United States over-expanded its credit creation, which led to a speculative rise in the securities market. Secretary of the Treasury Alexander Hamilton cajoled many banks into granting discounts to those in need of credit in multiple cities, in addition to utilizing numerous policies and other measures to stabilize U.S. markets.
While Wall Street’s first crash only lasted about one month, it was soon followed by a series of panics that occurred throughout the 19th and early 20th centuries. In the U.S., these include:
- Panic of 1819: Stemming from a collapse in cotton prices, a credit contraction, and over-speculation in land, commodities, and stocks, America’s first great economic depression came to an end in 1821.
- Panic of 1837: This panic was primarily attributed to a real estate bubble and erratic American banking policy. Then-President Andrew Jackson refused to extend the Second Bank of the United States’ charter, enabling state banks to recklessly issue banknotes. This led to a major economic depression that endured for six years.
- Panic of 1857: It was set off by the failure of the Ohio Life Insurance and Trust Company, which led to New York bankers putting restrictions on transactions that, in turn, resulted in panic selling. Bank closures and depression soon followed, the latter of which lasted three years.
- Panic of 1884: The panic was triggered by the failure of a small number of financial firms in New York City, primarily the Metropolitan National Bank. The institution’s closure raised public concerns about the banks in its network, but the crisis was largely contained to New York and swiftly ended.
- Panic of 1893: Amid a run on gold in the U.S. Treasury and slowed economic activity, unemployment jumped, asset prices plummeted, and panic selling ensued, which caused one of the most severe depressions in U.S. history.
- Panic of 1896: This was a continuation of the Panic of 1893, following a brief pause before the U.S. economy fell into another recession in late 1895. It wouldn’t fully recover until mid-1897.
- Panic of 1901: This panic occurred largely as a result of a struggle between Jacob Schiff, J.P. Morgan and James J. Hill, and E. H. Harriman over the Northern Pacific Railway. Short sellers were caught up in a frenzy as the price of Northern Pacific skyrocketed, causing stocks and bonds to drop dramatically. The Panic of 1901 ended with a truce among the financial titans.
- Panic of 1907: This was the first financial crisis of the 20th century, which spurred the monetary reform movement that led to the establishment of the Federal Reserve System (FRS), commonly referred to as the Fed. Following a failed attempt by F. Augustus Heinze and Charles W. Morse to corner the stock of United Copper, several banks associated with the two men succumbed to runs by depositors. This led to additional runs on numerous trust companies, which resulted in a severe reduction in market liquidity. If not for the intervention of J.P. Morgan, the New York Stock Exchange might very well have closed.
Black Friday occurred on Sept. 24, 1869, and saw the collapse of the gold market after two speculators, Jay Gould and Jim Fisk, concocted a scheme to drive up the price of gold. The duo also recruited Abel Rathbone Corbin to convince President Ulysses S. Grant to further limit the metal’s availability to ensure their plan was successful.
President Grant ordered the sale of $4,000,000 in government gold in response. Although Gould and Fisk had succeeded in driving up the price of gold, once the government bullion hit the market, panic ensued and the price of gold plummeted. Investors desperately tried to sell their holdings and, as many had taken out loans to finance their purchases, were left without any money to pay back their debts in the aftermath.
Dutch Tulip Bulb Market Bubble, also known as Tulipmania, is the earliest-known stock market crash. During the mid-1630s, tulips became widely popular as a status symbol in Holland and, as a result, speculation caused the value of tulip bulbs to increase. By 1636, the demand for tulips became so large that speculators began to trade in what were essentially tulip futures. In February 1637, however, the tulip bubble burst as the market fell apart.
Contemporary U.S. Stock Market Crashes
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Wall Street Crash of 1929
Prior to the Wall Street crash of 1929, share prices had risen to unprecedented levels. The Dow Jones Industrial Average (DJIA) had increased six-fold from 64 in August 1921 to 381 in September 1929. At the end of the market day on Oct. 24, 1929, known as Black Thursday, the market was at 299.5, a 21% decline.
A selling panic had begun and the following week, on Oct. 28, the Dow declined approximately 13%. On Black Tuesday, the market dropped again by nearly 12%. The crash lasted until 1932, resulting in the Great Depression, a time in which stocks had lost nearly 90% of their value. The Dow didn’t fully recover until November of 1954.
Two factors are commonly cited as the primary triggers of the crash including an attempt by governors of many Federal Reserve Banks and a majority of the Federal Reserve Board to combat market speculation and a major expansion of investment trusts, public utility holding companies, and the amount of margin buying.
Recession of 1937 to 1938
The Recession of 1937 to 1938 hit as the midst of recovering from the Great Depression. The primary causes of this recession are believed to be Federal Reserve and Treasury Department policies that caused a contraction in the money supply, in addition to other contractionary fiscal policies. As a result, real GDP fell 10%, while unemployment hit 20%, having already declined considerably after 1933.
In the year leading up to the recession, Fed policymakers doubled reserve requirement ratios to reduce excess bank reserves. Meanwhile, in late June 1936, the Treasury began to sterilize gold inflows by keeping them out of the monetary base, which halted their effect on monetary expansion. Once the Fed and the Treasury reversed their policies and the Roosevelt administration began pursuing expansionary fiscal policies, the recession ended.
Kennedy Slide of 1962
The Kennedy slide of 1962 was a flash crash, during which the DJIA fell 5.7%, its second-largest point decline ever at that time. This crash occurred following a run-up in the market that had lured many investors into a false sense of security, with stocks having risen 27% in 1961.
When the break happened, fear quickly spread. Households significantly reduced their purchases of stocks, leading to 8% of stockbrokers bailing the market throughout 1962.
Oct. 19, 1987, is known as Black Monday following the first financial crisis of the modern global era. The DJIA lost over $500 billion after dropping 22.6%, the largest one-day stock market decline in history. Preceding the event, the federal government disclosed a larger-than-expected trade deficit and the dollar fell in value, undermining investor confidence, and leading to volatility in the markets. Before the U.S. crash, markets in and around Asia plunged followed by New Zealand, Australia, Hong Kong, Singapore, and Mexico.
Black Monday causes include an increase in international investors’ activity in U.S. markets. In the years that followed, regulators introduced reforms to address the structural flaws that allowed Black Monday to occur such as stocks, options, and futures markets using different timelines for the clearing and settlements of trades. Trade-clearing protocols were overhauled to instill uniformity in all prominent market products. The first circuit breakers were also put in place so that exchanges could halt trading temporarily in instances of exceptionally large price declines.
Friday the 13th
The Friday the 13th mini-crash occurred on Oct. 13, 1989. That Friday, a stock market crash resulted in a 6.91% drop in the Dow. Prior to this, a leveraged buyout deal for UAL, United Airlines’ parent company, had fallen through. As the crash had transpired mere minutes after this announcement, it was quickly identified as the cause of the crash. However, this idea is considered unlikely, given that UAL only accounted for a fraction of 1% of the stock market’s total value. One theory is that the deal’s failure was seen as a watershed moment, foreshadowing the failure of other pending buyouts.
Since no concrete arguments have been offered explaining why this was a watershed event, it’s possible this was simply an attempt to make sense of the chaos in the financial markets. When the market reopened on Monday, investors had largely shrugged off the prior week’s plunge and had one of the heaviest trading days on record. This event was considered a mini-crash since the percentage loss was relatively small, particularly in comparison to the other crashes listed here.
The early 1990s recession began in July 1990 and ended in March 1991. Comparatively short-lived and relatively mild, it contributed to George H.W. Bush’s re-election defeat in 1992. Following another recession just three years prior, the collapse of the savings-and-loan industry in the mid-1980s, and the U.S. Federal Reserve’s interest rate increase in the late 1980s, this recession was sparked by Iraq’s invasion of Kuwait in the summer of 1990.
The dot-com bubble formed as a result of a surge of investments in the internet and technology stocks. The start-up hype that drove prices peaked in March 2000. By December of 2000, that same index had lost more than half of its value when the bubble burst and wouldn’t fully recover until early 2017.
Massive amounts of venture capital were dumped into tech and internet startups, while investors purchased shares in these companies on the hope of success. The crash wiped out $5 trillion U.S. in technology-firm market value between March and October of 2002.
U. S. Bear Market of 2007 to 2009
The bear market from 2007 to 2009 lasted a total of one year and three months. The S&P 500 lost 51.9% of its value. While this event can’t be considered a true stock market crash it’s still worth noting based on the steep losses.
2008 Recession Timeline
On Sept. 29, 2008, the stock market fell 777.68 points in intraday trading. It was at the time the biggest point drop in history. The immediate cause of the market crash was Congress’ initial refusal to pass the bank bailout bill that would stabilize the American financial system after a series of historic shocks. (The bill finally passed on Oct. 3, 2008.)
The shocks to the system up to that point had included:
July 11, 2008: Subprime mortgage lender IndyMac collapses, signaling the start of a wave of mortgage defaults by homebuyers.
Sept. 7, 2008: The government seizes control of Freddie Mac and Fannie Mae, which had guaranteed millions of bad loans.
Sept. 15, 2008: Lehman Brothers goes bankrupt under the weight of $619 billion in debt, much of it due to investments in subprime mortgages.
Sept. 16, 2008: The government bails out insurance company AIG by buying 80% of it. It does not bail out Lehman Brothers.
On March 5, 2009, the Dow Jones Industrial Average closed at 6,594, a drop of more than 50% from its pre-recession high.
2010 Flash Crash
On May 6, 2010, the S&P 500, the Nasdaq 100, and the Russell 2000 collapsed and rebounded within a 36-minute timespan. Approximately $1 trillion in market cap was wiped out on the DJIA, though it recovered 70% of its decline by end of the trading day.
In a joint study released by the CFTC and SEC in September 2010, they concluded that the flash crash was the result of a convergence of several factors, primarily a large volume of E-mini S&P 500 futures trading, illegal manipulative trading of many E-minis, and electronic liquidity providers pulling back on quotes once stocks began to plummet.
On Aug. 8, 2011, the U.S. and global stock markets fell as a weakening U.S. economy and a widening debt crisis in Europe dampened investor confidence. Before this event, the U.S. received a credit downgrade from Standard & Poor’s (S&P) for the first time in history amid an earlier debt ceiling impasse. Although the political gridlock was ultimately resolved, S&P saw the agreement as falling short of what was needed to repair the nation’s finances.
2015 to 2016 Stock Market Selloff
The 2015 to 2016 stock market selloff was a sersell-offobal sell-offs that took place over a one-year time frame beginning in June 2015. In the U.S., the DJIA fell 530.94, or approximately 3.1%, on Aug. 21, 2015. The market volatility initially began in China as investors were sold shares globally amid a slew of tumultuous economic circumstances, including the end of quantitative easing in the U.S., a fall in petroleum prices, the Greek debt default, and the Brexit vote.
2020 Coronavirus Crash
The 2020 coronavirus stock market crash is the most recent U.S. crash, which occurred due to panic selling following the onset of the COVID-19 pandemic. On March 16, the drop in stock prices was so sudden and dramatic that multiple trading halts were triggered in a single day. From Feb. 12 to March 23, the DJIA lost 37% of its value and NYSE trading was suspended several times.
The stock market rebounded and on Aug. 18, the S&P 500 was hitting record highs. On Nov. 24, 2020, the DJIA crossed 30,000 for the first time in history.
Below is a list of other notable crashes that affected the U.S. but are considered global events.
- Crisis of 1772: From 1770 to 1772, colonial planters were forced to borrow cheap capital en masse from British creditors. The resulting credit boom turned into a credit crisis when planters couldn’t repay their debt, causing numerous bankruptcies in London.
- Panic of 1796 to 1797: This crisis began after a U.S. land speculation bubble burst in 1796. On Feb. 25, 1797, the Bank of England suspended specie payments as part of the Bank Restriction Act of 1797.
The Panic of 1796 to 1797 led to the collapse of multiple prominent merchant firms in several major American cities as well as the imprisonment of many American debtors.
- Panic of 1873: Following a stock market crash in Europe, investors sold their investments in American railroads. When the U.S. bank Jay Cooke & Company went bankrupt, a bank run commenced. At least 100 banks collapsed and the NYSE was forced to suspend trading for the first time on Sept. 20, 1873.
- Economic effects of the September 11 attacks: The terrorist attacks on Sept. 11, 2001, occurred as the world economy was already experiencing its first synchronized global recession in a quarter-century. Stock market values in the U.K., Germany, France, Canada, and Japan generally move in tandem with those in the U.S. and they fell hard in the immediate aftermath of 9/11.
- Stock market downturn of 2002: Beginning in March of 2002, a downturn in stock prices was observed across the U.S., Canada, Asia, and, Europe. After recovering from the economic impact of the Sept. 11 attacks, indices started steadily sliding downward, leading to dramatic declines in July and September, with the latter month experiencing values below those reached in the immediate aftermath of 9/11.
- 2018 cryptocurrency crash: During the 2018 cryptocurrency crash, also known as the Bitcoin Crash or the Great Crypto Crash, most cryptocurrencies were sold and lost significant value, with Bitcoin dropping by 15%. The value of Bitcoin ultimately fell by approximately 65% from January 2018 to February 2018 and would not fully recover from this event until 2020.
What Was the Biggest Stock Market Crash of All Time?
During Black Monday, on Oct. 19, 1987, the DJIA fell by 22.6% in a single trading session. This marks the largest one-day stock market decline in history.
Where Should You Invest Your Money to Prepare for a Crash?
There are several steps you can take to minimize the impact of a stock market crash on your portfolio. One of the most important is to ensure you’ve diversified your portfolio across multiple sectors, such as stocks, bonds, cash, and real estate.
Are Stock Market Crashes More Common During Certain Times of the Year?
The October effect refers to a perceived market anomaly that stocks tend to decline in October, based on the fact that crashes, such as the Wall Street crash of 1929 and Black Monday occurred during this month. In fact, over the last 20 years, October has been one of the best months for stock growth. September has experienced more historically downward markets.
The Bottom Line
As a result of market cycles, stock market crashes and downtrends are an inherent risk of investing. Market downtrends don’t always result in a crash and although 2020’s crash won’t be the last one the U.S. will experience, it’s not clear how long it will be before we see the next one. Additionally, the most recent stock market crash makes for an excellent case study as to how quick, smart federal intervention can mitigate the effects of a crash.