A stock market crash is loosely defined as a sudden and sharp decline in stock prices across a broad portion of the stock market. Crashes can be triggered by panic, economic factors, bursting of speculative bubbles, and these days, by automated trading technologies.
Since 1772, the U.S. has experienced a total of 22 stock market crashes, but not all have been equally harsh or long-lasting. With that in mind, here are five of the most notable U.S. stock market crashes, and a brief rundown of the causes and results of each one.
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The Panic of 1907
One of the worst stock market crashes in U.S. history was the Panic of 1907. The stock market fell by about 50% during a three-week period in October and November of 1907, and started with a stock manipulation scheme gone wrong, which led to the collapse of the Knickerbocker Trust. This subsequently led to a panic that resulted in a string of bank failures.
Not surprisingly, this led to a general public distrust of the banking system. J.P. Morgan (now JPMorgan Chase) ended up bailing out the banking system by making over $100 million in loans to many large banks.
The Wall Street Crash of 1929
Perhaps the most well-known stock market crash in history, the Crash of 1929 was the worst, and longest-lived crash we've had. From September 1929 through July 1932, the Dow Jones Industrial Average lost a staggering 89% of its value.
The crash followed an age of innovation, with major technological advances such as radios, automobiles, telephones, and more becoming adopted on a wide scale. Think of the 1920s as the dot-com boom of its day. Plus, investors were using margin (buying stocks with borrowed money) on a wide scale to speculate on a stock market that never seemed to go anywhere but up. It seems outlandish today, but ordinary investors were allowed to use up to 10-to-1 leverage to purchase stocks.
During a roughly eight-year period from 1921 through 1929, the Dow increased by nearly 500%. It was the longest uninterrupted bull market in history.
Over a two-trading-day period in October 1929, panic began, investors were forced to sell stocks at massive losses due to margin calls, and the Dow lost 23%. Losses continued for several more years, eventually bottoming out in July of 1932, but the Great Depression lingered throughout the 1930s.
Black Monday, the stock market crash that occurred on October 19, 1987, was the largest one-day percentage drop in the Dow Jones Industrial Average in history. The Dow fell by 508 points on the day, which was a 22% drop at the time. For context, this would be like a one-day drop of 5,500 points in 2018.
As many other crashes, the Black Monday crash followed a major bull market in which the Dow rose by about 250% in a five-year period from 1982 through 1987. Also like many other crashes, it was preceded by a few smaller declines before major panic set in. Two of the three trading days preceding Black Monday were pretty dismal, with drops of 3.8% and 4.6%.
The Financial Crisis of 2008-2009
This is the one that's probably freshest in the minds of most people reading this, so I'll just give you a quick background. Easy credit and soaring real estate values led to rampant real estate speculation by people who, quite frankly, had no business speculating in real estate. The mortgage loans used, which in many cases were made for even more than the inflated values of the underlying homes, were packaged and sold to institutions as "investment grade" securities.
Thanks to this exposure, several financial institutions like Bear Stearns and Lehman Brothers collapsed, and panic about the future viability of the global financial system set in. From October 6-10 of 2018, the Dow Jones Industrial Average fell by 18%, and by March 6, 2009, the index had lost 54% of its previous high.
Of course, this is an over-simplification, and there's a whole list of contributing factors that led to the crash. In the aftermath of the financial crisis, there were numerous reforms enacted to ensure that major financial institutions would always be adequately capitalized to survive another severe downturn.
The Flash Crash of 2010
This was a short-lived crash, but I thought the "flash crash" was worth including as it is a great example of a new type of possible stock market crash -- one caused by high-frequency trading.
On May 6, 2010, the stock market was having a pretty negative day, with the Dow Jones Industrial Average down by over 300 points with just over an hour left in the trading session. At approximately 2:42 p.m. EST, the market dropped by another 600 points in five minutes. Keep in mind that the Dow was only at about 10,500 at the time, so this was a big drop, percentage-wise.
It was later determined that the flash crash was caused by the sale of a large amount of S&P 500 e-mini futures contracts, which in turn caused a ripple effect of automated trading that triggered the big drop. The market quickly recovered the majority of the flash-crash losses, and reforms were subsequently passed that intended to prevent a repeat, but with ever-evolving trading technologies, a flash crash remains a possibility going forward.
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