When a stock market experiences a crash, it is often the result of any number of economic events spurring investors to overreact out of fear. As the right circumstances and any bad news about the economy have the potential to set off a chain reaction that leads to a crash, these types of financial crises have appeared frequently throughout history. In the United States, stock market crashes go all the way back to the 18th century. Although there is no official timeline of U.S. stock market crashes due to differing opinions on what actually constitutes a “crash,” here’s what to know about the financial crises that we think fit the bill.
- Stock market crash often have a major economic impact; it can take a significant amount of time for marketplaces to return to their pre-crash levels.
- The earliest-known market crash was the Dutch Tulip Bulb Market Bubble, also known as Tulipmania, which took place in 1637.
- The first U.S. stock market crash was the Financial Crisis of 1791–92, an event that was preceded by the Crisis of 1772, which occurred in the Thirteen Colonies.
- The stock market crash of Oct. 19, 1987, also known as Black Monday, marked the largest one-day stock market decline in history.
- The most recent crash, the 2020 Coronavirus Stock Market Crash, only lasted a few months even thought the pandemic is still ongoing.
Stock Market Crash Basics
The term stock market crash refers to a sudden and substantial drop in stock prices. Stock market crashes are often the result of several economic factors, including speculation, panic selling, and/or economic bubbles, and they may occur amid the fallout of an economic crisis or major catastrophic event. While there is no official threshold for what qualifies as a stock market crash, a common standard is a rapid double-digit percentage decline in a stock index, such as the Standard & Poor’s 500 Index or Dow Jones Industrial Average (DJIA), over a couple days.
The effects of a stock market crash can have a major impact on the economy; it often takes a significant amount of time for full recovery. However, today there are measures in place to help prevent a stock market crash, such as trading curbs (also known as circuit breakers) that can halt any trading activity for a specific period of time following a sudden decline in stock prices.
Note that there is a difference between stock market crashes and bear markets. The latter term also refers to when a market experiences prolonged price declines; however, stock market crashes are typically more abrupt. Although it’s common for bear markets and stock market crashes to occur simultaneously, it is entirely possible to have one without the other. While this article focuses primarily on stock market crashes, many bear markets will also be covered due to the overlap.
Early US Stock Market Crashes
The first U.S. stock market crashes took place in March 1792. Prior to the Financial Crisis of 1791–92, the Bank of the United States over-expanded its credit creation, which led to a speculative rise in the securities market. When a number of speculators ultimately defaulted on their loans, it set off panic selling of securities. In response, then-Secretary of the Treasury Alexander Hamilton cajoled many banks into granting discounts to those in need of credit in multiple cities, in addition to utilizing numerous policies and other measures to stabilize U.S. markets.
Dutch Tulip Bulb Market Bubble, also known as Tulipmania, is the earliest-known stock market crash. During the mid-1630s, tulips became widely popular as a status symbol in Holland, and as a result, speculation caused the value of tulip bulbs to skyrocket. By 1636, the demand for tulips became so large that speculators began to trade in what were essentially tulip futures. In February 1637, however, the tulip bubble suddenly burst as the market fell apart.
While Wall Street’s first crash only lasted about one month, it was soon followed by a series of “panics” that occurred throughout the 19th and early 20th centuries. In the U.S., these included:
- Panic of 1819: Resulted from a collapse in cotton prices, a credit contraction, and over-speculation in land, commodities, and stocks. America’s first great economic depression came to an end in 1821.
- Panic of 1837: Primarily attributed to a real estate bubble and erratic American banking policy. Then-President Andrew Jackson refused to extend the Second Bank of the United States’ charter, enabling state banks to recklessly issue banknotes. This panic led to a major economic depression that endured for six years.
- Panic of 1857: Set off by the failure of the Ohio Life Insurance and Trust Company, which led to New York bankers putting restrictions on transactions that, in turn, resulted in panic selling. Bank closures and a depression soon followed, the latter of which lasted three years.
- Panic of 1884: Triggered by the failure of a small number of financial firms in New York City, primarily the Metropolitan National Bank. The institution’s closure raised public concerns about the banks in its network, but the panic was largely contained to New York and swiftly ended.
- Panic of 1893: Caused one of the most severe depressions in U.S. history. Amid a run on gold in the U.S. Treasury and slowed economic activity, unemployment jumped, asset prices plummeted, and panic selling ensued.
- Panic of 1896: A continuation of the Panic of 1893 following a brief pause before the U.S. economy fell into another recession in late 1895. It wouldn’t fully recover until mid-1897.
- Panic of 1901: Occurred largely as a result of a struggle between Jacob Schiff, J.P. Morgan & James J. Hill, and E. H. Harriman over Northern Pacific Railway. Short sellers were caught up in a frenzy as the price of Northern Pacific skyrocketed, causing stocks and bonds to drop dramatically. The Panic of 1901 ended with a truce among the financial titans.
- Panic of 1907: The first financial crisis of the 20th century, which spurred the monetary reform movement that led to the establishment of the Federal Reserve System (FRS). Following a failed attempt by F. Augustus Heinze and Charles W. Morse to corner the stock of United Copper, several banks associated with the two men succumbed to runs by depositors. This led to additional runs on numerous trust companies, which resulted in a severe reduction in market liquidity. If not for the intervention of J.P. Morgan, the New York Stock Exchange might very well have closed.
Amid the 19th century panics, Black Friday (not to be confused with a shopping holiday of the same name) occurred on Sept. 24, 1869. This event saw the collapse of the gold market after two speculators—Jay Gould and Jim Fisk—concocted a scheme to drive up the price of gold. The duo also recruited Abel Rathbone Corbin to convince then-President Ulysses S. Grant to further limit the metal’s availability to ensure their plan was successful.
However, President Grant eventually grew wise to their plot and ordered the sale of $4,000,000 in government gold in response. Although Gould and Fisk had succeeded in driving up the price of gold, once the government bullion hit the market, panic ensued and the price of gold plummeted. Investors desperately tried to sell their holdings, and as many had taken out loans in order to finance their purchases, were left without any money to pay back their debts the aftermath.
Contemporary US Crashes
Wall Street Crash of 1929
Prior to the Wall Street Crash of 1929, share prices had risen to unprecedented levels. The Dow Jones Industrial Average (DJIA) had increased six-fold from 64 in August 1921 to 381 in September 1929. However, at the end of the market day on Oct. 24, 1929, which became known as Black Thursday, the market was at 299.5—a 21% decline from the aforementioned high. A selling panic had begun. The following week, on Oct. 28, the Dow declined approximately 13%. One day later, on Black Tuesday, the market dropped again, this time by nearly 12%. The crash lasted until 1932, resulting in the Great Depression—by the end of which stocks had lost nearly 90% of their value. The Dow didn’t fully recover until November 1954.
Although the exact cause(s) of the 1929 crash isn’t/aren’t completely agreed upon, two factors are commonly cited as the primary triggers. First was an attempt by governors of many Federal Reserve Banks and a majority of the Federal Reserve Board to combat market speculation. Second was a major expansion of investment trusts, public utility holding companies, and the amount of margin buying. The latter three elements fueled an increase in the prices of public utility stocks, which were vulnerable to any bad news regarding utility regulation. So, when a deluge of bad news arrived in October, utility stocks plummeted. This forced margin buyers to sell, inciting panic selling of all stocks.
Recession of 1937–38
The third-worst downturn in the 20th century, the Recession of 1937–38 hit as the U.S. was in the midst of recovering from the Great Depression. The primary causes of this recession are believed to be Federal Reserve and Treasury Department policies that caused a contraction in the money supply, in addition to other contractionary fiscal policies. As a result, real GDP fell 10%, while unemployment hit 20%, having already declined considerably after 1933.
In the year leading up to the recession, Fed policymakers doubled reserve requirement ratios to reduce excess bank reserves. Meanwhile, in late June 1936, the Treasury began to sterilize gold inflows by preventing them from becoming part of the monetary base, which halted their effect on monetary expansion. Once the Fed and the Treasury reversed their policies and the Roosevelt administration began pursuing expansionary fiscal policies, the recession came to an end.
Kennedy Slide of 1962
The Kennedy Slide of 1962 was a flash crash, during which the DJIA fell 5.7%, its second-largest point decline ever at that time. This crash occurred following a run-up in the market that had lured many investors into a false sense of security, with stocks having risen 27% in 1961. When the break happened, fear quickly spread. Households significantly reduced their purchases of stocks, leading to 8% of stockbrokers quitting throughout 1962. Investors also seriously cut down on new mutual fund investments. It would take two years for fund sales to fully recover.
Oct. 19, 1987, came to be known as Black Monday following the first financial crisis of the modern globalized era. The DJIA crashed at the opening bell and lost over $500 billion after dropping 22.6%, the largest one-day stock market decline in history. In the days proceeding the event, a deluge of bad news, such as the federal government disclosing a larger-than-expected trade deficit and the dollar falling in value, had undermined investor confidence, leading to additional volatility in the markets. Prior to the U.S. clash, markets in and around Asia began plunging. Ultimately, New Zealand, Australia, Hong Kong, Singapore, and Mexico had also suffered crashes.
Regulators and economists identified several likely causes of Black Monday, such as international investors having become increasingly active in U.S. markets in the years prior, which would account for some of the pre-crash stock price surges. In the years that followed, regulators introduced reforms in order to address the structural flaws that allowed Black Monday to happen. At the time, stock, options, and futures markets used different timelines for the clearing and settlements of trades. Trade-clearing protocols were overhauled to instill uniformity in all prominent market products. The first circuit breakers were also put in place so that exchanges could halt trading temporarily in instances of exceptionally large price declines.
Friday the 13th Mini-crash
The Friday the 13th Mini-crash occurred on Oct. 13, 1989. That Friday, a stock market crash resulted in a 6.91% drop in the Dow. Prior to this, a leveraged buyout deal for UAL, United Airlines’ parent company, had fallen through. As the crash had transpired mere minutes after this announcement, it was quickly identified as the cause of the crash. However, this idea is considered unlikely, given that UAL only accounted for a fraction of 1% of the stock market’s total value. One theory is that the deal’s failure was seen as a watershed moment, foreshadowing the failure of other pending buyouts. Since no concrete arguments have been offered explaining why this was a watershed event, it’s possible this was simply an attempt to make sense of the chaos in the financial markets. When the market reopened on Monday, investors had largely shrugged off the prior week’s plunge and had one of the heaviest trading days on record. This event was considered a mini-crash since the percentage loss was relatively small, particularly in comparison to the other crashes listed here.
Early 1990s Recession
The Early 1990s Recession began on July 1990 and ended on March 1991. Comparatively short-lived and relatively mild, it still contributed to George H.W. Bush’s re-election defeat in 1992. Following another recession just three years prior, the collapse of the savings-and-loan industry in the mid-1980s, and the U.S. Federal Reserve raising interest rates in the late 1980s, this recession was kicked off by Iraq’s invasion of Kuwait in the summer of 1990. This event caused the global price of oil to spike, decreased consumer confidence, and exacerbated a downturn that was already underway.
The Dot-com Bubble formed as a result of a surge of investments in the 1990s into anything related—or at least perceived to be related—to the Internet as well as other technology stocks. During this period, several new firms came into being, most of which never generated any profit. The hype led to the Nasdaq index tripling in value over an 18-month period, peaking in March 2000. By the end of the second millennium’s final year, however, that same index had lost more than half of its value when the bubble finally burst. It wouldn’t fully recover until 2015.
Building the bubble was massive amounts of venture capital being dumped into tech and Internet startups, while investors kept purchasing shares in these companies on the assumption that they’d be successful. When these startups eventually ran out of money, and new sources of capital had dried up, the excitement turned to panic. The resultant crash wiped out $5 trillion U.S. in technology-firm market value between March and October 2002.
U. S. Bear Market of 2007–2009
The bear market from 2007 to 2009 lasted a total of one year and three months, though there was a brief bull market for 1.5 months near the end. The S&P 500 lost 51.9% of its value. While this event can’t be considered a true stock market crash due to how drawn out the decline was, it’s still worth noting because of how steep the losses were.
Financial Crisis of 2007–08
The Financial Crisis of 2007–08, also known as the Subprime Mortgage Crisis, came as a result of the U.S. housing market collapse and ultimately led to the Great Recession. Over a two-year period prior to the crisis, the Fed had been steadily raising the the federal funds rate from 1.25% to 5.25%, which led to escalating numbers of subprime borrowers defaulting. When the resultant housing bubble finally burst, it created a domino effect that forced even large financial firms to liquidate hedge funds invested in mortgage-backed securities, appeal for government loans, merge with healthier companies, or declare bankruptcy.
By 2008, as the crisis endured and the losses continued to mount, the U.S. Treasury Department had to nationalize the country’s two biggest home lenders, Fannie Mae and Freddie Mac, in order to prevent their collapse. Later that year, the investment bank Lehman Brothers filed the largest bankruptcy ever in U.S. history. In October 2008, the U.S. government approved a bailout package in an effort to protect the U.S. financial system and promote economic growth. By mid-2009, the economy had finally begun to recover.
2010 Flash Crash
On May 6, 2010, the S&P 500, the Nasdaq 100, and the Russell 2000 all suddenly collapsed and rebounded within a 36 minute timespan. Approximately $1 trillion in market cap was wiped out on the DJIA, though it recovered 70% of its decline by end of the trading day. In a joint study released by the CFTC and SEC in September 2010, they concluded that the Flash Crash was was the result of a convergence of several factors, primarily a large volume of E-mini S&P 500 futures trading, illegal manipulative trading of many E-minis, and electronic liquidity providers pulling back on quoting prices once stocks began to plummet.
August 2011 Stock Markets Fall
On Aug. 8, 2011, U.S. and global stock markets fell as a weakening U.S. economy and a widening debt crisis in Europe dampened investor confidence. A prior to this event, the U.S. received a credit downgrade from Standard & Poor’s (S&P) for the first time in history amid an earlier debt ceiling impasse. Although the political gridlock was ultimately resolved, S&P saw the agreement as falling short of what was needed to repair the nation’s finances.
2015–16 Stock Market Selloff
The 2015–16 Stock Market Selloff refers to a series of global sell-offs that took place over an approximately one-year time frame beginning on June 2015. In the U.S., the DJIA fell 530.94, or approximately 3.1%, on Aug. 21, 2015. The market volatility initially began in China, but economic turmoil within this country wasn’t solely to blame for the crisis. Investors were selling shares globally amid a slew of tumultuous economic circumstances, including the end of quantitative easing in the U.S., a fall in petroleum prices, the Greek debt default, and the Brexit vote. Although the U.S. stock markets never truly crashed, it is still worth noting due to the enduring impact this had on U.S. markets and that it cause crashes in other parts of the world, such as China.
The 2020 Coronavirus Stock Market Crash is the most recent U.S. crash, which occurred due to panic selling following the onset of the COVID-19 pandemic. On March 16, the drop in stock prices was so sudden and dramatic that multiple trading halts were triggered in a single day. From Feb. 12–March 23, the DJIA lost 37% of its value, and NYSE trading was suspended several times. Airlines, cruise lines, and energy companies were particularly hard hit as a result of the crash thanks to travel restrictions countries implemented to limit the disease’s spread.
However, while the pandemic itself is still ongoing, the crash it inspired didn’t last that long. In fact, the stock market began to rebound, and by Aug. 18, the S&P 500 was hitting record highs once more. Meanwhile, on Nov. 24, the DJIA crossed 30,000 for the first time in history. The rapid recovery was due to the Fed, the Treasury Department, and Congress acting quickly to support the economy during the onset of the crisis by approving supplemental unemployment benefits and stimulus checks, cutting interest rates, and implementing new lending programs.
Other Crashes That Affected the US
Below is a list of other notable crashes that affected the U.S. but didn’t originate within the country itself, were too global to be considered “U.S. stock market crashes,” and/or only affected a specific asset/company’s stock (i.e., not one of the major indices):
- Crisis of 1772: The first financial crisis in what became the U.S. occurred when the East Coast was still referred to as the Thirteen Colonies. From 1770–1772, colonial planters were forced to borrow cheap capital en masse from British creditors. The resulting credit boom turned into a credit crisis when planters couldn’t repay their debt, causing numerous bankruptcies in London. The crisis came to an end in 1773, though many American planters still had to work down their credit exposure over a couple of years.
- Panic of 1796–1797: This crisis began after a U.S. land speculation bubble burst in 1796. Then, on Feb. 25, 1797, the Bank of England suspended specie payments as part of the Bank Restriction Act of 1797. This exacerbated the problems in America, as the disruption of access to British gold and silver unraveled the Atlantic credit web. The Panic of 1796–1797 led to the collapse of multiple prominent merchant firms in several major American cities as well as the imprisonment of many American debtors.
- Panic of 1873: Conversely, this crisis began in Europe following a stock market crash. Investors began to sell off their investments in American railroads, which led to many going bankrupt. When the U.S. bank Jay Cooke & Company, which had a significant amount of money invested in railroads, also went bankrupt, a bank run commenced. At least 100 banks collapsed, and the NYSE was forced to suspend trading for the first time on Sept. 20, 1873.
- Economic Effects of the September 11 Attacks: The terrorist attacks on September 11, 2001, occurred as the world economy was already experiencing its first synchronized global recession in a quarter-century. Stock market values in the U.K., Germany, France, Canada, and Japan generally move in tandem with those in the U.S., and they fell hard in immediate aftermath of 9/11. The debris from the collapsing towers also forced the NYSE to close; it reopened alongside other major indices on Sept. 17, all of which plummeted once trading began. Stock prices fell throughout the rest of September, though they managed to recover to their pre-attack levels by mid-October.
- Stock Market Downturn of 2002: Beginning March 2002, a downturn in stock prices was observed across the U.S., Canada, Asia, and, Europe. After recovering from the economic impact of the September 11 attacks, indices started steadily sliding downward, leading to dramatic declines in July and September, with the latter month experiencing values below those reached in the immediate aftermath of 9/11.
- 2018 Cryptocurrency Crash: During the 2018 Cryptocurrency Crash, also known as the Bitcoin Crash or the Great Crypto Crash, most cryptocurrencies were sold off and lost significant value, with Bitcoin itself dropping by around 15% in a matter of hours in a single day. The value of Bitcoin ultimately fell by approximately 65% from January 2018 to February 2018. By November of the same year, its price had fallen 80% compared to January 2017. Bitcoin wouldn’t fully recover from this event until 2020.
What Was the Biggest Stock Market Crash of All Time?
During Black Monday, Oct. 19, 1987, the DJIA fell by 22.6% in a single trading session. This marks the largest one-day stock market decline in history.
Where Should You Invest Your Money to Prepare for a Crash?
There are several steps you can take to minimize the impact of a stock market crash on your portfolio. One of the most important is to ensure you’ve diversified your portfolio (i.e., spreading your investments across multiple sectors, including stocks, bonds, cash, real estate, derivatives, cash-value life insurance, annuities, precious metals, etc.). You may also want to keep a small portion of your savings in safer, guaranteed investments (i.e., CDs and Treasuries).
Are Stock Market Crashes More Common During Certain Times of the Year?
The October effect refers to a perceived market anomaly that stocks tend to decline in October, based on the fact that crashes, such as the Wall Street Crash of 1929, Black Monday, etc., occurred during this month. Statistically, however, this isn’t true. In fact, over the last 20 years, October has been one of the best months for stocks. September, meanwhile, actually has more historical down markets.
As a result of market cycles, stock market crashes are an inherent risk of investing. No matter how high an index rises, there’s only so much it can grow before sellers take action. However, market downtrends don’t have to result in a crash, so long as cooler heads prevail. While 2020’s crash certainly won’t be the last one the U.S. will experience, it’s not clear how long it will be before we see the next one. Additionally, the most recent stock market crash makes for an excellent case study as to how quick, smart federal intervention can mitigate the worst effects of a crash.