The worst stock market crashes of all time

The world has experienced several major stock market crashes as a result of mass panic and a lack of confidence in stock values – they are either a symptom of, or the trigger for, global financial instability. We take a look at some of the worst stock market crashes of all time and their impact on the global economy.

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Source: Bloomberg

Why does a stock market crash?

Stock market crashes are driven by investor panic as much as any underlying economic factor. When investors lose confidence, it can lead to significant sales on a stock exchange and a resultant drop in prices that can trigger a mass sell-off. The increase in the volume of trades also exacerbates the fall in prices.

With the internationalisation of stock markets, and the emergence of electronic systems, crashes can now spread very quickly across the world, which can magnify the collapse of markets.

Crashes often occur after an extended period of buying pressure, when greed has driven stock prices so high that they are considered overvalued. Because these prices are unsustainable, the market can eventually crash. Although this pattern is well established, most economists agree that it is still difficult to predict a stock market crash.

However, you can prepare yourself for a crash and learn how to take advantage of the market movements they cause. Discover how to trade a stock market crash.

The biggest crashes the stock market has ever seen

Regardless of what caused them, stock market crashes can have an undeniable influence on global economic activity. However, it is important to note that not all market crashes have long-lasting economic effects. Some are just ‘flash crashes’, which are more short-term drops in the stock market.

We will take a look at a timeline of stock market crashes, and the economic impacts (if any) they have had on the world.

The Wall Street crash, 1929

The Wall Street crash of 1929 hit the New York Stock Exchange (NYSE) on 24 October. It is considered the most famous stock market crash of the 20th century, and the greatest crash in the history of the United States.

What happened?

During the 1920s, the United States and Europe experienced strong economic growth, and the increase in industrial production saw stock prices on the New York Stock Exchange rise by approximately 300%. This rapid growth caused investors to get greedy, as they focused on the possibility of buying stocks and reselling them for significant gains.

The period of wild speculation had caused unsustainable growth, which led to share prices becoming separated from the real value of the stocks. Inevitably, these expectations came crashing down when 12.8 million shares were put up for sale on the Wall Street exchange on 24 October (known as ‘Black Thursday’) – the sheer quantity caused stock prices to fall into a decline. On 29 October, or ‘Black Tuesday’, the NYSE had four times the normal trading volume as panicked investors took to the market to sell their shareholdings. The Dow Jones dropped by over 12%.

The crash marked the beginning of the ‘Great Depression’, a ten-year recession that impacted most westernised economies, and resulted in widespread poverty and unemployment.

Black Monday, 1987

Black Monday, often referred to as the stock market crash of 1987, impacted stock markets across the world including Hong Kong, London, Berlin and New York. It was considered the single worst trading day since the Wall Street crash.

1987 market crash chart

What happened?

According to some economists, the crisis was brought on by an overvalued dollar, rising interest rates and the formation of a speculative bubble on the stock market. The bulls had been driving the US market since 1982, which had caused the valuations of company shares to climb to excessive levels.

But eventually the financial markets buckled and on Monday 19 October 1987, the Dow Jones stock index lost more than 500 points in just a few hours – a fall of nearly 22%. This sent markets into a bear cycle, which spread across European and the Asian markets.

The crash was also thought to be directly related to the newly automatic trading systems. The concept of large-scale electronic trading was still new, and the capabilities had never faced a test like Black Monday.

Unlike the stock market crisis of 1929, the 1987 crash didn’t have quite the same impact on the US economy, largely due to the role played by the US Federal Reserve (the Fed), which intervened quickly in the market to slash interest rates and manage market liquidity by increasing lending and conducting open-market purchases. US growth was barely affected, and the Dow Jones was able to return to pre-crash levels within two years.

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Stock market crash of 2008

The stock market crash of 2008 began in September when the Dow Jones fell 777.68 points in intraday trading. The trigger for the crash was the US Congress rejecting a bank bailout bill, but the causes of the crash had been building throughout the year before, culminating in what we now call the ‘Great Recession’.

2008 market crash chart

What happened?

During the mid-2000s, the US housing market experienced a boom that reached unprecedented levels, caused by subprime mortgages – a new type of loan granted to individuals with poor credit scores, who would not have been able to apply for conventional mortgages.

But, in 2006, the real estate market collapsed and started a chain reaction which led to the 2008 financial crisis. The banks lost the confidence to loan to each other due to the increased risk that they could receive these mortgage-backed securities as collateral. The lack of lending led to a series of interest rate rises, which hit consumers hard and meant that many new homeowners had to default on their debts.

Things came to a head in September 2008 when Lehman Brothers, the fourth-largest investment bank, announced bankruptcy. The Fed sent a bank bailout bill to Congress, but it was rejected, and the Dow Jones fell by 777.68 points in response. Global markets also panicked, with oil falling from $100 a barrel at the beginning of September 2008 to less than $70 by the end of that month.

Although Congress accepted the bill in October 2008, the damage was done. The Dow Jones had fallen by 13%, and the US economy had contracted by 0.3% – the nation was officially in recession. There was a significant domino effect and, as financial institutions all over the world collapsed, global stock markets plummeted. In March 2009, the Dow Jones bottomed out at around 6594.44 points.

The stock market crash of 2008 has been likened to the events of Black Thursday, as the rates of decline were very similar. It took until 2013 for the stock markets to fully recover.

The flash crash, 2010

On 6 May 2010, the US stock market experienced a flash crash that wiped billions of dollars off the share prices of large US companies like Procter & Gamble and General Electric. The stock market crash started at 2:32pm (New York time) and lasted for approximately 36 minutes – the decline occurred at a speed never seen before but had a very minimal impact on the US economy.

2010 market crash chart

What happened?

As the market opened on 6 May 2010, there were general market concerns over the debt crisis in Greece, as well as a UK general election. Shortly after 2:30pm, the flash crash began, and within ten minutes the Dow Jones had declined by more than 300 points – other US indices were affected, including the S&P 500 and NASDAQ composite. Within another five minutes, by 2:47pm, the Dow had dropped a further 600 points to reach a loss of nearly 1000 points for the day.

By 3:07pm, the market had regained much of the decline, and only closed 3% lower than it opened. The explanations for the crash range from ‘fat-fingered’ trading – a keyboard error in technical trading – to an illegal cyberattack. Investigations initially pointed the blame toward a single market participant, who was thought to have illegally manipulated the market through ‘spoofing’, which is the practice of deceiving electronic systems into moving in a more favourable direction.

However, it is thought that the causation was multifaceted. A joint report between the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) stated that it was likely a combination of prevailing market conditions, and the large automated sell order that caused the extreme price movement.1

1 SEC-CFTC, 2010

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