A stock market crash is a sudden drop in stock prices affecting a significant cross-section of stock sectors and a significant portion of society. Crashes are triggered by panic selling and weakening underlying economic conditions.
Here is a chronicle of some of the biggest stock market crashes from when the stock market began to the present day, shaping the stock market’s history and global economy.
1873: The Vienna Stock Exchange Crash
The early 1870s were marked by the collapse of several banks in Europe. This crisis was followed by the crash of the Vienna Stock Exchange, which then affected central Europe and later the United States.
On Black Friday, May 9, 1873, triggered by uncontrolled speculation, a massive fall in the value of shares on the Vienna Stock Exchange, and a wave of panic selling.1 The Vienna stock market crash also led to a fall in the number of visitors to the Vienna World Exhibition being held.
A further consequence was that a stock exchange commissioner was appointed to supervise compliance with a new law regulating the exchange. The need for a new legal framework was recognized, and the Stock Exchange Act was created in 1875. It was considered one of the first modern stock exchange laws in Europe and, with few changes, regulated Austria’s stock exchange system until 1989.
1907: The Panic of 1907
Two minor speculators, F. Augustus Heinze and Charles W. Morse, took substantial bank loans to buy many shares of the United Copper Company.2 One of Heinz’s brothers, Otto, planned to control the company. The company couldn’t survive under the weight of speculation, and stock prices plunged. Many other companies followed. Public confidence in banks and financial institutions dwindled, and depositors pulled out their funds.
This led to a massive drop in the share prices of banks, stock brokerages, and financial institutions. The top executives of these banks were laid off due to weakening finances, and other businesses suffered due to a lack of bank loans. The Panic of 1907 continued for six-week impacting banks in New York City and other American cities between October and early November.
Heinz, who was heavily involved in the entire affair, suffered personally and financially. He was prohibited from forming other associations in financial institutions.
Many also considered the 1906 earthquake in San Francisco as the reason behind the panic of 1907.3 The city’s devastation led to a liquidity crunch creating a recession in 1907.
The entire corporate landscape was in shambles, and there was an immediate need to inject liquidity. The US Treasury pumped massive funds into the failing banks to save them but to no avail.
Private financier, JP Morgan, came to the rescue during the Panic of 1907. He called upon a joint force from the leading financiers to study the situation and understand their point of view. He analyzed the banks which could be revived and bailed them out. Morgan also faced a lot of criticism for being selective in his approach to rescuing the failing institutions.
The US stock market witnessed massive growth during the 1920s, also known as the Roaring Twenties.
The overheated economy reached its peak in 1929, following a lot of speculation. There was economic deterioration with a decline in agricultural and industrial production and a rise in unemployment. To add to the woes, the debt levels climbed while the wage rate began to slip. Most of the stock prices were highly overvalued.4
The stock prices began to drop gradually in September and October 1929. Panic selling started the 1929 stock market crash on October 21 and lasted till October 29, 1929. This day, also known as the Black Tuesday, is one of the biggest reasons behind the Great Depression in the United States, lasting for more than twelve years, making the 1929 market decline the worst stock market crash in history.
On October 28, 1929, the Dow Jones Industrial Average declined close to 13%. Nearly $14 billion were wiped off the equity markets in just a day. Investors traded 16,410,030 shares on the New York Stock Exchange in a single day, which was a record number of transactions at the time.
To make matters worse, between 1929 and 1933, real estate market construction of residential property fell 95 percent.
The New York Fed jumped into action to bail out the situation. It bought government securities on the open market and boosted lending by lowering the discount rate.5 It also eased the reserve pressure that the banks in New York City faced, enabling them to meet the pressing demand of customers during the crisis.
While the New York Fed protected the banking sector, commerce and manufacturing were severely affected by the stock market crash. However, the impact of the stock market crash of 1929 fizzled out within the next few months, and the economic recovery started gradually by the fall of 1930.
Stock markets climbed upward during the first half of 1987, and by late August, the DJIA had surged 44%, fuelling concerns of an imminent asset bubble. The fears came true when on October 19, 1987, the Dow Jones Industrial Average had a sharp decline of 22.6%. Economists attributed the sudden crash to factors that included geopolitical events and computerized trading that were in their infancy.6
The federal government posted a wider-than-expected trade deficit while the dollar declined.7 During the middle of October 1987, markets began to see massive daily losses. Alan Greenspan, the then-Fed Chairman, lowered interest rates and asked banks to inject liquidity into the system. Treasury Secretary James Baker also decided to devalue the US dollar to plug the widening trade deficit.
A significant reason behind the 1987 crash was the computerized program trading. This idea was still relatively new to Wall Street. In program trading, there is no human intervention or judgment. The buy or sell orders are auto-generated based on the price levels of benchmark indices. In some cases, the orders are also triggered based on the pricing of specific stocks. Therefore, these models generated more buy orders when prices rose and more sell orders when prices began to decline.
Japan’s real estate and stock markets had risen to extraordinary heights in the 1980s. A solid economic growth first backed the rise. However, the spiral had turned speculative by the end of the decade.
On December 29, 1989, the Nikkei stock market index touched a record high of 38,916, just before the country’s asset-inflated bubble burst.
The deflation of Japan’s asset price bubble led to a phase that many call the Lost Decade lasting from 1991 to 2001.8 The Bank of Japan resorted to monetary tightening to control the overheated asset market. BOJ tightened monetary policy and hiked the official rate from 4.25% to 6.00%. Rising interest rates led to a liquidity crunch, and the economy went downhill. “Japan’s 1980s bubble was the bursting start of a long adaption from a young, fast-growing economy to an aging, slow-growth new normal,” says Martin Schulz, senior economist at the Fujitsu Research Institute.9
By the end of 1990, the rise in asset prices in Tokyo stabilized, but the uptrend continued in other urban nodes in Japan.
By the time the fifth monetary policy tightening happened, the stock market had plummeted, losing more than $2 trillion by December 1990. The stock prices tumbled, and Nikkei plunged 63.8% between December 1989 to August 1992.10
After 1991 that residential, commercial, and industrial prices in Tokyo fell sharply. Land prices in other urban areas in Japan clocked in just modest growth. Towards 1992, most urban land prices slipped into negative territory.
The ‘Tom Yum Kung’ financial crisis originated in Thailand in 1997 and threatened the country’s status as an Asian Tiger economy. Between 1985 and 1996, the Thai economy grew nearly by 9% per annum. But the 1997 financial market crash caused irreversible damage to its prospects.11
In the early 1990s, Thailand’s banking and regulatory system was highly acclaimed in the international business landscape. However, in 1996, the media revealed that the Bangkok Bank of Commerce (BBC) had lent billions of Thai Bhat in bogus loans. The bank also loaned a massive amount to a criminal locally known as the ‘Biscuit King”.
After that, there were similar scandalous revelations about other banks in Thailand, which deeply hurt investor confidence. By the end of 1997, several banks and financial institutions were closed down due to such corrupt practices. The extent of the non-performing loans exceeded 16% during the phase.
As a result, business and commerce suffered massively, and the impact spread to other Asian economies like the Philippines, Malaysia, Hong Kong, Singapore, and Taiwan. For the first time in 20 years, the Thai Government suspended the Stock Exchange of Thailand (SET) on March 3, 1997.
On May 15, 1997, the Bank of Thailand ordered banks to stop lending to foreign speculators. By July 1997, about 90% of the Thai foreign reserves were pulled out from the country by the hedge funds. The Thai Bhat, then pegged to the US Dollar, came under tremendous pressure, and the government was compelled to float the currency freely. After this, the Thai Bhat lost 20% of its value, and the IMF had to step in to bail out the country. It announced nearly a $35 billion rescue package for adjustment and economic reforms in Thailand, Indonesia, and South Korea, primarily impacted by the crisis.12
Between 1995 and 2000, internet-based start-up tech companies had caught every investor’s fancy in the dot-com era. Most people blindly pumped money into these ventures substituting cash flows for clicks to determine the strength of their business model. NASDAQ Composite, the technology focussed index, climbed from below 1,000 in 1995 to unprecedented heights of 5,408.60 on March 10, 2000.13
Technological advancement and the innovative business offerings by the new internet-based companies made investors believe they were infallible.14 Historically, low-interest rates by the Federal Reserve bank in 1998 allowed easy entry of tech-based companies, many of which had no solid foundation. Most of them had no product plan and spent 90% of the money on just brand building.
Due to hot money flowing into these companies and the “buy stocks” mentality, their valuations became overinflated. By 2001, many ‘dot-com companies’ such as Pets.com became bankrupt. The stock market bubble finally burst between 2001 and 2002. NASDAQ, which had climbed five times between 1995 and 2002, dropped 77% to 1,139.90 on October 4, 2002. Even blue-chip technology stocks like Intel, Cisco, and Oracle lost over 80% of their value. Between 2000 and 2002, the S&P 500 plunged 9.1%, 11.9%, and 22.1% each year.13
It took over a decade for the stock markets to regain their past position. Only a few companies like Amazon, Priceline, and eBay survived the crisis, with many losing their life savings.
The subprime crisis led to one of the biggest stock market crashes. The main reason behind the subprime crisis in 2008 was excessive loans given to parties who could not afford to repay them.15 The crisis represents another aspect when low-interest rates, rising home prices, and securitization of mortgages attracted huge money from investors in the promise of massive gains. Inadequate regulation of the investment banks, relaxed lending norms, and an overheated asset market contributed to the crisis.
In March, global investment bank Bear Stearns failed massively and acquired JPMorgan Chase for a meager amount.16 After that, IndyMac Bank became another major bank to fail. The US government also seized two of the biggest home lenders in the US, Fannie Mae, and Freddie Mac.
The bankruptcy of Wall Street bank Lehman Brothers was the biggest one in the history of the United States. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was passed to stop the collapse of the US financial system during the subprime mortgage crisis.17 The Act authorized the treasury to purchase up to $700 billion worth of mortgage-backed securities and other troubled assets from the American banks and other financial institutions.
On May 6, 2010, the markets in the United States saw the shortest crash as it lasted for nearly 36 minutes. It was also known as the crash of 2:45. There were general market concerns about the Eurozone debt crisis and general election in the UK during that time. The Dow Jones Industrial Average dropped 9% of its value on May 6, 2010. It fell 4% in the afternoon, and it further slid another 5% to 6% within minutes. After which, it rebounded quickly. Eventually, the DJIA was down only 3%.18
The US stock market prices fell for just a few minutes and wiped off billions of dollars from big companies. Some securities lost up to 99% of their value in a few minutes.
US regulators stated that a $4.1 billion computerized trading order by the investment firm Waddell & Reed was responsible for the crash. At that time, Regulation NMS, meant to revolutionize and strengthen the United States National Market System, was passed. Many high-frequency traders began to take undue advantage of this system, which resulted in a crash.
One stock trader primarily associated with the Flash Crash of 2010 was the London-based trader Narinder Singh Sarao. The BBC reported, “the flash-crash trader remotely used specially adapted software to trade on the Chicago Mercantile Index. He bought and sold contracts that effectively speculated on the value of the top US companies.” Sarao was arrested in 2015 and deported to the US after four months.19
The Chinese stock market saw immense turbulence between June 12, 2015, and February 2016. Panic selling in July 2015 wiped over $3 trillion from the mainland share market within just three weeks. By July 2015, the Shanghai stock market plunged over 30%, and more than 1,400 listed companies applied for a trading halt to avoid further losses.
The over-enthusiastic campaign by the Chinese government to encourage citizens to invest prompted the surge in Chinese markets from the mid of 2014 until June 2015.20 The Government made a lot of tall claims about the economic growth because of which the Shanghai market doubled in value between 2014 and the middle of 2015. Over 38 million new investment accounts were opened just two months before the crash.21
After the crash, the Chinese government purchased vast amounts of stock to arrest the free fall in the markets. Later, it also lowered transaction costs and loosened margin requirements to alleviate investors’ concern over margin defaults.
Despite the Chinese government’s attempt toward market stabilization, markets dropped further between January and June 2016. It launched a new circuit breaker mechanism to prevent massive falls that happened the year before. But, the plan did more harm than good. The Shanghai and Shenzhen stock markets crashed on January 4, followed by another one on January 7. The circuit breaker halted trading in both these cases. More than $1 trillion of value was erased from the exchanges in two days.
The sudden devaluation of the Chinese Renminbi on August 11 and concerns over a weak economic outlook also caused the crash. It also placed the over emerging economies under pressure.
The Chinese government’s confusing policy initiatives and lackluster response raised questions about its commitment to economic reforms and execution abilities.
COVID-19 is one of the worst pandemics that humankind has ever seen. By 2020, COVID-19 had already spread across most locations in China, Europe, and the US. The human loss of the pandemic has been quite devastating.22 With most countries going into lockdowns, investors guessed that the coronavirus spread would negatively affect the economy. As the pandemic shut down the US, the stock markets crashed. Things started going downhill in February 2020, and the selloff became intense in mid-March 2020.23
On March 16, 2020, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq fell in the range of 12% to 13%. The S&P 500 ultimately dropped 34% between February 19 and March 23. But the markets were quick to recover, and the S&P 500 returned to its highs by August.
Banks across the world cut their interest rates to support the investors and markets. The Cares Act of 2020 also allowed extended unemployment payments, while the US government’s stimulus funds helped citizens survive.
As remote working, learning, and shopping became the new standard, companies that facilitated those became winners. Most of them were technology companies like Amazon, Zoom, and Microsoft. Health was the primary concern during the pandemic. Many pharmaceutical and biotechnology companies also surged in value.
History bears testimony that some of the biggest stock market crashes have destroyed economies for years. Stock market crashes have a profound impact on a nation’s real estate, too. Once the investor sentiment is dampened and the market declines, consumer spending goes downhill. As a result, fewer people decide to buy homes, and property prices plummet.
On the other hand, some crashes only shook investor confidence and prompted people to make more cautious choices. But, one thing is common: Most stock market crashes have led the governments to adjust their economic policies and bring in fruitful reforms. Some of them have also altered the way businesses are conducted forever.
The Federal Reserve System was created on December 23, 1913, after the aforementioned financial panics led to the desire for central control of the monetary system to alleviate financial crises.
The US government established the Federal Deposit Insurance Corporation (FDIC) in 1933 after a series of banking failures. The objective of the FDIC was to insure bank deposits against loss in the event of a bank failure and to regulate certain banking practices.
Similarly, in 1970, The Securities Investor Protection Corporation (SIPC), a nonprofit membership corporation, was created under a federal statute. SPIC protects investors’ assets in a brokerage account.
The stock exchanges have also imposed specific controls to avert such market crashes in the future. These include circuit breakers and trading curbs. For instance, the New York stock exchange has placed trading stops on all equities and derivatives markets in the event of a significant decline.
Right from oil prices to house prices, there can be myriad reasons for a market crash. However, the outcome was the same: the market recovers in the long term.