Unanticipated events can sometimes stir up fear among investors, leading to a market crash. Such financial calamities, although painful reminders of volatility, have been a part of U.S. history since the 18th century.
Defining a Stock Market Crash
A stock market crash refers to a swift and significant drop in the prices of stocks. These crashes are usually the outcome of several economic triggers such as speculative trading, panic selling, and economic bubbles, possibly amidst an economic crisis or a significant catastrophic occurrence.
A stock market crash does not have an official definition in terms of thresholds. However, it is often characterized as a sudden double-digit percentage drop over several days in a significant stock index, like the S&P 500 Index or the Dow Jones Industrial Average (DJIA).
Certain strategies like trading curbs or circuit breakers have been implemented to help avert a market crash. These measures can pause trading activities for a set period after a sudden plunge in stock prices.
Early Incidents of U.S. Stock Market Crashes
The first recorded U.S. stock market crash happened in March of 1792. Prior to the Financial Crisis of 1791-1792, the Bank of the United States had excessively expanded its credit, triggering a speculative surge in the securities market.
Secretary of the Treasury Alexander Hamilton persuaded numerous banks to extend credit to those in need across various cities, while also implementing several policies and measures to stabilize U.S. markets.
This initial crash was short-lived, lasting just a month. However, it marked the onset of a series of financial panics throughout the 19th and early 20th centuries. One such example is Black Friday, which transpired on September 24, 1869. This day marked the collapse of the gold market due to a scheme by two speculators, Jay Gould and Jim Fisk. They manipulated the price of gold and used Abel Rathbone Corbin to convince President Ulysses S. Grant to limit the metal’s availability further, ensuring their plan’s success.
In response, President Grant ordered the sale of $4 million in government gold. Though Gould and Fisk succeeded in inflating the price of gold, panic set in and the price plummeted when the government bullion entered the market. Investors rushed to offload their holdings. In the aftermath, many were left with significant debt as they had taken loans to finance their investments.
The 1929 Wall Street Meltdown
Before the catastrophic Wall Street collapse of 1929, there was a dramatic surge in share prices. Indeed, from August 1921 to September 1929, the Dow Jones Industrial Average (DJIA) soared by a factor of six. However, by the end of trading on October 24, 1929, known as Black Thursday, the market had plummeted to 299.5, marking a 21% decrease. Panic selling ensued, leading to a further 13% decline on October 28 and another nearly 12% drop on Black Tuesday. This downward spiral continued until 1932, ushering in the Great Depression, during which stocks lost nearly 90% of their value. It was not until November 1954 that the Dow fully bounced back.
The Economic Downturn of 1937-1938
The 1937-1938 recession struck in the middle of recovery efforts from the Great Depression. The key culprits were believed to be contractionary fiscal policies and measures by the Federal Reserve and Treasury Department that led to a tightening of the money supply. Consequently, the GDP shrank 10%, and unemployment soared to 20%. In the year leading up to the recession, the Federal Reserve policymakers raised reserve requirement ratios to decrease excess bank reserves. At the same time, the Treasury began sterilizing gold inflows, preventing them from contributing to monetary expansion.
The 1962 Kennedy Plunge
The Kennedy Slide of 1962 was a sudden market crash during which the DJIA dropped by 5.7%. This followed a period of market growth that had led many investors to feel overly secure. As panic spread following the sudden drop, households drastically cut their stock purchases, and a significant number of stockbrokers left the market in 1962.
The Black Monday Catastrophe
Black Monday took place on October 19, 1987, leading to a record-breaking 22.6% drop in the DJIA, the largest single-day stock market decline in history. Prior to this, the U.S. had revealed a larger than anticipated trade deficit, causing the dollar’s value to plummet and shaking investor confidence. This led to a ripple effect, with markets across Asia and other parts of the world also falling steeply.
The Mini-Crash of Friday the 13
On October 13, 1989, a stock market crash popularly referred to as the Friday the 13th mini-crash caused a 6.91% drop in the Dow. This crash occurred shortly after a leveraged buyout deal for UAL, United Airlines’ parent company, failed. While the reasons for the crash are subject to speculation, it is considered a mini-crash due to its relatively small percentage loss compared to other major crashes.
The Early 90s Economic Slump
The early 1990s economic slump began in July 1990 and ended in March 1991. Although relatively brief and mild, it had significant political repercussions, contributing to George H.W. Bush’s defeat in the 1992 re-election. Factors such as another recession just a few years prior, the collapse of the savings and loan industry in the mid-1980s, and the Federal Reserve’s increased interest rates in the late 1980s, set the stage for this recession. The trigger, however, was Iraq’s invasion of Kuwait in the summer of 1990.
The Dotcom Bubble Burst
The dotcom mania was an investment frenzy that saw an influx of funds into internet and technology-based stocks. The inflated prices reached their zenith in March 2000, followed by a swift downfall. By December the same year, more than half the value of the Nasdaq 100 index was wiped out. The index only managed to reach new heights again in 2017. The exuberance of the period led to a free flow of venture capital into tech and internet ventures. Investors piled into these companies hoping to hit jackpot. However, the crash obliterated $5 trillion worth of market value of technology firms between March and October 2002.
The Recession of 2008
The most significant point drop in history, until then, occurred on Sept. 29, 2008, with the stock market falling 777.68 points during the day. The primary catalyst behind this abrupt downfall was the initial refusal of Congress to pass the bank bailout bill, designed to steady the American financial system after a string of unprecedented upheavals. The bill eventually gained approval on Oct. 3, 2008. Early signs of trouble included the failure of subprime mortgage lender IndyMac, the government’s seizure of Freddie Mac and Fannie Mae due to bad loan guarantees, the bankruptcy of Lehman Brothers, and the bailout of AIG. By March 5, 2009, the Dow Jones dropped over 50% from its pre-recession high.
The 2010 Market Volatility Event
On May 6, 2010, the stock market experienced a swift and dramatic downturn and recovery within 36 minutes. The DJIA lost approximately $1 trillion in market capitalization, though managed to recoup 70% of the loss by end of the trading day. The CFTC and SEC’s joint investigation in September 2010 attributed the flash crash mainly to heavy trading of E-mini S&P 500 futures, unlawful manipulative trading practices, and automated liquidity providers retracting quotes as stock prices began to descend.
Financial Instability of 2011
Aug. 8, 2011, marked a steep fall in U.S. and global stock markets, driven by a weak U.S. economy and escalating debt crisis in Europe, which undermined investor confidence. Prior to this, the U.S. had its credit rating downgraded by Standard & Poor’s (S&P) for the first time in history, due to a deadlock over the debt ceiling. Although the political impasse was eventually resolved, S&P deemed the resolution insufficient to rectify the country’s fiscal situation.
