With the stock market nearing all-time highs, investors may be worried about a possible crash, but just because stocks are high doesn’t mean a crash is coming.
Stock prices can go up and down all the time, so declines are not uncommon. However, a stock crash is different in that prices drop sharply over a short period of time. In reality, it is extremely difficult, if not impossible, to predict a stock crash in advance.
Perhaps the most significant stock market crash in U.S. history occurred in October 1929. The stock market reached an all-time high in September, but on October 24th, stock prices began to fall. The following Monday and Tuesday became known as Black Tuesday, and the Dow Jones Industrial Average fell nearly 25%, ushering in the Great Depression.
The other major October crash, more sudden, occurred on October 19, 1987 and became known as Black Monday. Although investors were concerned about the US trade deficit and tensions in the Middle East, computer-driven trading was a major factor in the crash, causing the Dow Jones Industrial Average to fall about 22%, the largest one-day drop in history.
Here’s what you need to know about a major stock market crash and some tips for protecting your portfolio.
Major stock market crash statistics
- The largest one-day declines for the S&P 500 and the Dow Jones Industrial Average occurred on October 19, 1987, when the S&P 500 fell 20.5% and the Dow fell 22.6%.
- Two of the four largest declines in the Dow Jones Industrial Average occurred on consecutive days, October 28 and 29, 1929. Between those two days, the market fell by roughly 25%.
- The Dow Jones Industrial Average reached an all-time high in September 1929 before the crash, and it took 25 years, in November 1954, for it to return to its pre-crash high.
- The Dow Jones Industrial Average fell 89 percent from its peak in September 1929 and bottomed out at 41.22 in the summer of 1932, its lowest closing price of the 20th century.
- The Dow’s six biggest one-day declines all occurred in the first half of 2020, as investors struggled with the effects of the COVID-19 pandemic.
- The Dow’s largest one-day drop was on March 16, 2020, when the index fell 2,997 points, or 12.9%.
- The S&P 500’s largest one-day drop also occurred on March 16, 2020, when it fell 324.9 points, or roughly 12%.
Black Tuesday: October 29, 1929
The stock market rose steadily throughout the 1920s, reaching an all-time high in September 1929, more than six times its level in August 1921. Economist Irving Fisher famously declared that the stock market had reached a “permanent high” and it didn’t take long for the market to correct his opinion.
The sell-off began on Thursday, October 24, but the crash picked up steam on the following Monday and Tuesday, causing the Dow to fall 13% and 12%, respectively. By mid-November, the Dow was nearly half its September high, destroying the fortunes of investors and speculators alike.
The market continued to decline over the next few years as the economic hardships of the Great Depression set in. The market finally bottomed out in July 1932, with the Dow Jones Industrial Average falling 89% from its pre-crash high to close at 41.22. It would not recover to its September 1929 high until November 1954.
The Great Crash of 1929 occurred during a time of strong economy and technological advances. The automobile and telephone were widely available new inventions, and more working-class families began investing in the stock market. Many did so using margin accounts, which allowed them to borrow a large portion of their investment using their stocks as collateral. However, this encouraged stock speculation, causing stock prices to rise to unsustainable levels. Eventually, the bubble burst and the stock market crashed.
Black Monday: October 19, 1987
The 1987 stock market crash, commonly known as Black Monday, is known as the largest one-day drop in the history of the U.S. stock market. On October 19, the Dow Jones Industrial Average fell 22.6%, a shocking drop of 508 points.
The crash was somewhat of an isolated event and did not have the same impact as the 1929 crash. Although there were concerns about a widening U.S. trade deficit and tensions in the Middle East, the main cause of the crash was blamed on computer trading programs. The algorithms increase buying when prices rise and increase selling when prices fall. The widespread sell-off on October 19th led to further selling as some traders panicked and the market seemed unable to find a bottom.
However, stock prices quickly recovered after the crash and finished 1987 with a small gain. Less than two years later, the market had recouped all of its losses from the crash.
The dot-com bubble burst: 2000-2002
The economy was growing strongly throughout much of the 1990s. The internet was emerging, and there was widespread optimism that new technology would transform people’s lives. The technology-heavy Nasdaq Composite Index grew from 1,000 to more than 5,000 companies between 1995 and 2000. Companies that had nothing to do with technology or the internet included “.com” in their names in the hopes that investors would bid higher for their shares.
But in early 2000, the bubble began to burst. Five of the worst 15 days in Nasdaq history occurred between April 2000 and January 2001. On April 14, 2000, the Nasdaq index fell nearly 10%, the second-largest one-day drop at the time. By the time the market bottomed in October 2002, the Nasdaq had lost nearly 80% of its value.
This was an unusual environment in that not all stocks crashed. Shares of companies tied to the “old economy” with its stable profit growth, which investors had shunned during the tech boom, rose even as tech stocks were sold off. Warren Buffett’s Berkshire Hathaway’s shares soared more than 25% in 2000, and insurance company Progressive’s shares rose more than 40% in 2000 and 2001.
Global Financial Crisis: 2008-2009
In the fall of 2008, the housing market collapse brought the US financial system to the brink of collapse, and the US government stepped in to bail out banks and financial institutions that were unable to cover losses related to subprime mortgages. Signs of trouble first appeared in 2007, but the stock market rose. As the scale of the problem became clear throughout 2008, stock prices fell, eventually reaching a critical moment in September of that year.
During a hectic weekend in New York City, the US government organized the sale and rescue of supposedly failed financial institutions, including Merrill Lynch and AIG. The stock market was extremely volatile during this period, rising on news of the government’s rescue package and falling when Congress rejected the original plan. Between late September and early December, there were four days when the S&P 500 fell 7-8% in a single day.
As the economy worsened and investors realized the United States was sliding into its worst recession since the Great Depression, the market continued to fall. The market eventually bottomed out in March 2009, with the S&P 500 falling nearly 60% from its October 2007 peak. It took until April 2013 to surpass its previous high.
COVID-19 pandemic: 2020
One of the most unusual stock market crashes occurred in March 2020 as investors realized the severity of COVID-19 and its impact on the global economy.
On March 16, 2020, the Dow Jones Industrial Average fell nearly 3,000 points, or about 13%, marking its largest point drop ever and its biggest one-day percentage drop since the 1987 crash.
After hitting an all-time high on February 19, 2020, the S&P 500 fell 34% by March 23, one of the sharpest declines in history. However, the market began to recover as the Federal Reserve and the U.S. Treasury stepped in to support the economy and provide increased payments to those most affected by the pandemic. By August, the market reached new highs and continued to rise through most of 2021.
Is the stock market crashing?
The stock market has not crashed and is performing well into 2024, delivering above-average returns since the 2008 financial crisis. Stock market crashes are very difficult to predict and nearly impossible to avoid for long-term investors. Investors who plan to hold stocks for decades will likely experience several market corrections, crashes and severe bear markets over their investment lifetimes.
As of June 4, 2024, the historical trends of the three major indexes are as follows:
- Dow Jones Industrial Average: Up 2.5%
- S&P 500: Up 10.6%
- Nasdaq Composite Index: Up 11.9%
How to protect your portfolio during a downturn
While it’s difficult, if not impossible, to predict a market crash in advance, there are steps you can take to protect yourself during a market downturn.
- Have the Right Mindset – It is important to have the right mindset when investing in the stock market. If you are a long-term investor saving for retirement, you do not need to predict every downturn. You need to understand that downturns happen from time to time and are a normal part of investing. Many people start investing at the wrong time, exit, and become their own worst enemy when it comes to investing. Focus on your long-term goals.
- Contribute regularly – If you participate in a workplace retirement plan, such as a 401(k), you can take advantage of lower prices that occur during market downturns by contributing regularly. This approach, called dollar-cost averaging, involves buying more shares when prices are low and fewer shares when prices are high.
- Cash is valuable – If you are very concerned about the possibility of markets falling, consider increasing the cash holdings in your portfolio. Cash protects you when prices fall and gives you the opportunity to reinvest your cash at more attractive yields. However, over time cash is likely to become a drag on your investment performance, so be sure to invest it when markets fall.
- Don’t Invest with Debt – Investing with debt is one way to increase your returns, for better or worse, but it can really get you in trouble during a downturn. As an investor, you expect downturns, but you can recover over time. But investing with debt can turn a normal downturn into a life-changing event that can cause your net worth to plummet. Most investors are better off not opening a margin account.
Bankrate Rachel Christian contributed to an updated version of this story.
