The biggest stock market crashes in history

Stock market crashes

Stock market crashes terrify most traders, especially newbies.

Historically, stock markets gain in value over time. They tend to follow the progress and growth of societies. But sometimes economic conditions can go through a quick turnaround.

This shouldn't stop you from investing in the stock market. The stock market has always experienced recoveries. The stock market crashes of the last century were only a temporary change in the long upward trend of the world's stock markets. And for clever traders, stock market crashes can be synonymous with great buying opportunities. Savvy investors can even make cheap investments.

What determines the prices of shares?

Once an IPO is completed, the price of a share can go up or down regardless of the company's success.

So what makes a share price go up or down? The answer is simple: supply and demand. Price movements simply reflect supply and demand. Thus, when a share is deemed desirable because of the recent success of the company, a strong industry or simply fashion and popularity, its price rises. If traders are unwilling to buy a share because the company is in trouble, the industry is weak or the price is simply too high, this lack of demand will drive the price down. At some point, the price will be low enough that traders will be ready to buy again and the cycle will start all over again. Investors like Warren Buffett specialise in finding unpopular stocks in forgotten sectors that still have good earnings and a strong future. They buy them (or buy the whole company, as Buffett often does) and wait for the price to rise.

The major milestones of the stock market

The stock exchange has been around for many centuries. It has gone through countless ups and downs through economic changes, wars and social and technological developments.

This is one of the most interesting aspects of the market - it's always interesting. Let's take a look at some of the greatest stock market periods in recent times.

The Dutch tulip bubble (1637)

The tulip mania was the first major financial bubble - it occurred mainly in the Netherlands between 1634 and 1637.

After tulip bulbs contracted a tulip-specific, non-lethal virus, their price rose steadily and made this already overpriced flower even more popular. The value of tulip bulbs then increased 20-fold in just 1 month.

But as happens in speculative bubbles, the holders ended up selling their tulips to cash in their profits, leading to a downward spiral of continuously falling prices. Although not a widespread craze, it hurt a handful of buyers in this ephemeral luxury market.

More than anything else, the tulip bubble crash serves as a lesson regarding the dangers of excessive greed and speculation.

The gret Wall Street crash of 1929

The "Roaring 20s" were a time of excesses and wild speculation. It all came to an end in October 1929, culminating on the infamous "Black Tuesday" on 29 October, when 16 million shares were sold on the NYSE in one day and the market collapsed.

On 21 October, panic selling began and on 29 October, prices collapsed.

Financial legends such as the Rockefeller family and William Durant ventured to correct the market by buying large quantities of shares, but the rapid fall in prices didn't stop.

In 1930, the US was in the midst of the Great Depression - probably the most painful crash in history.

It spread far beyond the United States, and by 1932 world GDP had contracted by over 14%.

The gloomy 1970s

The 1970s were a dark period for the stock market. The economy experienced what is known as stagflation: when there is minimal economic growth, high unemployment and rising costs.

The 70s were also marked by a terrible stock market crash. The Dow's main shares lost over 44% of their value. It was one of the worst stock market crashes of all time.

But it wasn't even the worst... In London, the main UK stocks lost over 72% of their value at one point.

Black Monday (1987)

34 years ago, the world's financial markets experienced one of their worst days ever: "Black Monday".

The crash began in Asia, gained ground in London, and ended with a 23% drop in the Dow Jones Industrial Average on the same day in New York.

The crash is thought to have been triggered by a combination of computerised trading models that malfunctioned, a drop in oil prices and increased tensions between the US and Iran.

But unlike the 1929 stock market crash, Black Monday didn't lead to an economic recession. The world's markets recovered in the following years.

The Russian crash (1998)

It's hard to overstate the scale and the impact of the 1998 stock market crash. The entire Russian economy collapsed in a relative instant.

The monetary crisis that started in Asia in 1997 crushed commodity prices and oil fell to $9 per barrel in early 1998. Russia's budget was then balanced at $13.25 per barrel (its threshold profitability in 2008 was $120) and Boris Yeltsin's government didn't have much cash to begin with.

At the start of the crisis, the state's foreign exchange reserves were only $5.5 billion (compared to $475 billion now), so the drop in oil prices quickly caused a collapse. New Prime Minister Sergei Kiriyenko tried to avoid the worst, but on 16 August he finally ended the crisis.

The ruble rate tripled at the beginning of September. Inflation climbed to nearly 81% and the central bank's attempt to stabilise the economy using a fixed exchange rate between 1994 and 1998 was a total failure.

The crisis led to the collapse of the country's largest private banks. Although most of the depositors of these banks were rescued by the central bank, the money was returned so slowly that inflation had engulfed between a third and half of its value. Foreign currency deposits forcibly converted into rubles suffered the same fate. The savings of retirees were once again wiped out.

The biggest banks received emergency funds from the IMF, but that money immediately left Russia for offshore financial havens and owners let their banks shut down. Most banks shifted anything of value into "bridge banks" and let their flagship banks collapse.

Russia also defaulted around $39 billion in local treasury bonds. These short-term treasury bills - widely held by foreign investors and since replaced by OFZs -are government-issued treasury bills (and they are even more widely held by foreign investors now). These vouchers were blocked in special "S" accounts that allowed certain transactions, but they could not be turned into cash that could be withdrawn from Russia. Technically, Russia hadn't defaulted, but they delayed all bond repayments by 4 years. Russia eventually honored their obligation and when the money in the "S" account was allowed to be used for equity investments a few years later, it contributed to the boom in Russian equities which began around 2004. and investors ultimately made good money.

This incident was a defining moment in Russian history. It caused much suffering, but it also restored the Russian economy by increasing the value of the ruble.

The building of the internet bubble (1990-1999)

This bubble was fueled by investments in technology companies during a late 1990s bull market.

By the end of 2001, dozens of companies had gone bankrupt and the stock prices of tech giants like MP3.com and Intel fell.

Over $6.5 trillion in market value was destroyed and stocks entered a bear market.

It took the tech-heavy Nasdaq 14 years (until 22 April 2015) for it to reach its peak in the dot-com business sector.

The Asian financial crisis (1997)

Originating in Thailand, a severe financial crisis hit many Asian countries in the late 1990s.

Foreign investors feared that Thailand's debt would rise too quickly when Bangkok freed its currency from the USD, and general confidence evaporated.

The countries most affected were Indonesia, South Korea, China, Laos, Malaysia and the Philippines as the currency decline quickly spread to all countries and capital inflows dropped by over $100 billion.

The Asian crisis ended up destabilising the national economies of other emerging countries: Russia, Argentina and Brazil in particular.

Bursting of the internet bubble (2000)

The dot-com bubble began to inflate during the late 1990s, as internet access grew and computers took an increasingly important place in people's everyday lives. One of the main drivers of this growth was e-commerce.

Due to both investment and enthusiasm, stock values ??rose. The NASDAQ, home to many of the biggest tech stocks, rose from around 1,000 points in 1995 to over 5,000 just 5 years later. Companies were going into the market with IPOs and raising huge amounts of capital, with shares sometimes doubling from the first day. It was a genuine fantasyland, where any entrepreneur with a decent new concept could make big money.

But in March 2000, the dot-com bubble, which had formed for nearly 3 years, slowly began to burst. Stock prices collapsed. Businesses closed. Fortunes were lost, and the US economy began to slide into what became a full-blown recession.

On 10 March, the combined value of shares on the NASDAQ was $6.69 trillion; the crash began on 11 March. On 30 March, the NASDAQ was valued at $5.99 trillion. On 6 April 2000, it was at $5.77 trillion. In less than a month, nearly a trillion dollars in market value had completely evaporated. That April, a JP Morgan analyst told said that many companies were losing between $9 million and $29 million per quarter - a rate that is obviously not sustainable and that would end in a large number of dead websites and investment losses.

The subprime crisis (2008)

Before 2008, everyone envied the US economy. Real estate was booming, people could easily borrow money, and the stock market was soaring.

It seemed like almost everyone was making money.

This boom was the result of various economic policies, technical and financial innovations and a good dose of euphoria. But sadly, a lot of these policies and innovations weren't that smart, and those good times just ended.

We witnessed an economic storm of monumental proportions. The housing market collapsed. Banks went bankrupt. Even famous institutions like Bear Stearns and Lehman Brothers met a quick death. The stock market was utterly beaten to a pulp.

The Dow lost over 49% of its value and global markets suffered similar damage. Times were so scary that many believed we were reliving the 1929 Great Depression.

Fortunately, things turned around pretty quickly. Central banks worldwide stepped in and cut interest rates to historically low levels. I'm not saying that this is a good thing, but it seems to have fostered an economic recovery and a bull market for a decade.

The US "Flash Crash" (2010)

The US Flash Crash occurred on 6 May 2010. During this crisis, major stock indexes such as the Dow Jones Industrial Average, the S&P 500, and the Nasdaq, fell and partially bounced back in less than an hour. The day was characterised by high volatility in trading of all types of securities, including stocks, futures and options.

As of the morning, trading in the main US markets showed a negative trend mainly due to concerns about the financial situation in Greece and the upcoming UK elections. In the afternoon, the major equity and futures indices were down 3.9% from the previous day.

At 3 p.m., the discussions became extremely turbulent. The DJIA (Dow Jones Industrial Average) had lost around 950 points in 5 minutes. However, in the next 30 minutes, the index recovered over 550 points.

Other North American stock indices were also affected by this market crash. The VIX Volatility Index rose 21.9% on the same day, while the S&P/TSX Composite Index in Canada lost more than 5% of its value in just 30 minutes.

At the end of the trading day, the major indices had regained over half of their lost value. Nonetheless, this market crash cost investors approximately $1 trillion.

Debt crisis (2011)

The European debt crisis is the consequence of Europe's struggle to pay off the debts it had accumulated over the past decades. Several countries - Greece, Ireland, Italy, Portugal and Spain - had failed, to varying degrees, to generate sufficient economic growth to guarantee their ability to repay bondholders.

Although these countries were considered to be in immediate danger of possible failure at the height of the crisis, it had far-reaching consequences that affected the rest of the world.

The global economy had grown slowly since the 2008-2009 US financial crisis, which highlighted the unsustainable tax policies implemented in Europe as well as around the world.

Greece, which spent heartily for years and failed to implement any serious tax reforms, was one of the first to feel the pinch from weaker growth. When growth slows, tax revenues also slow, making high budget deficits unsustainable. In fact, Greece's debt was so large that it actually exceeded the size of the entire national economy, and the country could no longer hide the problem.

Traders responded by demanding higher yields on Greek bonds, which increased the cost of the country's debt burden and required a series of bailouts by the European Union and its ECB. Markets have also started to push up bond yields of other heavily indebted countries in the region, anticipating problems similar to those in Greece.

In the spring of 2010, the EU and the IMF paid €109 billion (the equivalent of $162 billion) to Greece. The nation needed a second bailout in mid-2011, this time worth around $158 billion. On 9 March 2012, Greece and its creditors agreed to a debt restructuring that paved the way for a new round of bailout funds. Ireland and Portugal also benefited from bailouts in October 2010 and June 2011, respectively.

The possibility of contagion made the European debt crisis a focal point for global financial markets during the 2010-2012 years. With the recent turmoil in 2009, traders reacted quickly to bad news in Europe: Sell anything risky and buy government bonds from the biggest and most financially sound countries.

In general, European bank shares - and the European market as a whole - fared much worse than their global counterparts during periods when the crisis was the center of attention. Bond markets in affected countries also performed poorly as higher yields push prices lower. At the same time, yields on US T-Bills have fallen to historically low levels, reflecting traders' "flight to safety".

After Mr. Draghi announced the ECB's commitment to preserve the European economy, markets rallied around the world. The region's bond and equity markets have since recovered, but the region will need to experience sustained growth for the recovery to continue.

The Chinese stock market collapse (2015)

For three weeks in June 2015, growing financial risks across the country caused a chaotic sell-off panic that wiped out over $2.9 trillion in the value of national stocks.

Among the possible triggers for the market collapse were a surprise devaluation of the Chinese yuan and a weakening of China's growth prospects, which then put pressure on emerging economies that depended on China for growth.

The worst day of the crash was on 12 June, when the Shanghai stock index lost over 30% of its value, as losses were even more pronounced in the small Shenzhen Composite index.

Market crash following the worldwide Coronavirus epidemic (2020)

The new Covid-19 (which stands for COronaVIrus Disease-2019) outbreak not only caused a global health crisis, but also a recent global recession that began on 19 February.

Although the greatest impact of the Covid-19 crisis was initially felt in China, it quickly spread to the rest of the world - just like the virus - leading to lockdowns and hurting economic activity everywhere.

The US officially entered a recession, and virtually every other world economy followed suit.

On 16 March the S&P 500 recorded its biggest drop since 1988, as many companies went bankrupt and travel restrictions were put in place. The market reaction was brisk, but short-lived, and by the next quarter stocks were back to their pre-crash levels.

Oil price collapse (2020)

On 20 April, the price of U.S. oil was negative for the first time in history as demand for the product plummeted during the virus situation as international travel went to a halt.

When the May oil futures contract expired, many traders had to take delivery of the physical oil, and therefore were forced to sell in a panic, which caused the commodity's price to drop below zero.

In March, the OPEC oil production cartel held talks to step up production cuts until the end of the following year.

Russia disagreed to these changes, and a price war was launched by the Saudi Arabian member to fight for more market share.

Oil lost around 25% of its value, with Brent crude sliding 23% to $33.40 and US oil 35% to $27.41.

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