8 of the biggest stock market crashes in history – and how they changed our financial lives

stock market crash
Stock market crashes, like the one in October 1929, don’t single-handedly cause depressions, but they often expose weaknesses in the economy.

  • 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.
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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 the scoop on eight of the most notable stock market crashes in recent financial history, their causes, and their fallout. Unless otherwise noted, they occurred on US exchanges, though the effect often spread to other countries.

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. Black Monday and Tuesday, Oct. 28-29, 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 Oct. 28-29. The Dow Jones Industrial Average dropped 25% in those days. 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. 

3. Black Monday, October 19, 1987

What happened: Sinking oil prices and US-Iran tensions had turned the market pessimistic. But what led to the wipeout 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, 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. 

5. Asia Financial Crash of 1997 (aka Tom Yum Kung Crisis)

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, 2000-02

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. “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.

7.  Subprime Mortgage Crisis, 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  Oct. 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. COVID-19 crash, March 16, 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, 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.

The Financial Takeaway

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.

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