What is Market Crash?

What is Market Crash

A market crash is a rapid and sharp drop in stock prices that happens unexpectedly.

While there is no set number, a typical stock market crash will result in losses of more than 10% within a few days, as measured by the largest such as the S&P 500, NASDAQ and DIJA.

While the term “crash” is sure to inspire fear among investors, it is important to understand that crashes are a natural occurrence in the markets and happen all too often.

To put this in context: There have been 38 officially documented market corrections in the S&P 500 since 1950.

This is an average every 1,84 years, with a correction defined as a decline of at least 10% from the last closing highs.

Of these market corrections, at least 9 were categorized as official bear markets, with declines of more than 20% from the highs. The average is one bear market every 7,78 years.

Market Crash: But How Long Do They Last?

Of the 38 S&P 500 market corrections since 1950, about 63% have lasted a high of 3,5 months, with another 18% taking up to 10 months to find a low.

This means that more than 80% of market corrections lasted less than 1 year.

While market corrections are discussed in terms of months, bull markets are generally considered in terms of years.

That's why it's important to point out that virtually all of the S&P 500's documented market corrections ended up being wiped out by the subsequent bull market rally.

Even accounting for all these market corrections/downs, the S&P 500 has historically had an average annual return of 7%.

So while any stock market crash is scary in the short term, in hindsight they are all great opportunities for the long term investor.

Market Crash: The most famous stock market crashes in recent history

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As mentioned, stock market crashes are not isolated events in history. There are many of them, and they all teach investors valuable lessons.

Here are some of the most notable stock market crashes in history:

  • The Tulip Crisis of 1637

This is one of the most documented stock market crashes, in which tulips were considered a rare commodity, with prices rising as much as 10 times the average wage of a decent worker.

The prices of tulip bulbs dropped when people started buying them on credit, and to this day the term “tulipomania” symbolizes the dangers of human greed.

  • The South Sea Bubble of 1720

Founded in 1711, the South Sea Company would enter the lucrative slave trade in the South and Central American regions.

The company's shares were bought by both the British government and the public, but what initially appeared to be a profitable business did not match its earnings, and the previously inflated shares collapsed, losing over 82% of investor wealth.

  • The stock market crash of 1873

After the US Civil War, railroad construction exploded in the United States, with over 35.000 miles of track built between 1865 and 1873.

When the big bank Jay Cooke and Company collapsed in 1873, citing, among other reasons, its inability to trade in railroad debt, panic gripped the market, and the resulting economic crisis nearly brought down the railroad industry, then the largest non-agricultural employer in the country.

  • The Panic of 1907

This panic occurred in 3 weeks in October 1907 and resulted in the NYSE falling over 50% from the previous year's highs.

A failed attempt to monopolize a large copper company was the trigger, but it ended up falling for hire and inspired depositors' distrust of financial institutions.

  • Wall Street Crash of 1929

After a period of positive speculation that has been dubbed the “Roaring Twenties”, everything came to a halt on Black Tuesday, October 29, 1929, when stock prices plummeted, and over 16 million shares were traded. This drop signaled the beginning of the Great Depression, and it wasn't until 1954 that stock prices returned to pre-Depression levels.

  • 1987 'Black Monday' Crash

On October 19, 1987 (referred to as “Black Monday”), the US Dow Jones Industrial Average dropped over 22% in a single day (the biggest drop ever).

This is considered to be the first contemporary market crash, triggered by aggressive computer-driven trading models, investor panic and portfolio insurance strategy.

  • The Japanese asset bubble burst in 1992

An economic bubble in Japan between 1986 and 1991 saw stock and property prices inflate wildly.

Easy credit and rampant speculation drove prices higher, but the bubble burst in 1992 and it was not until 2008 that prices began to rise again.

  • 1997 Asian financial crisis 

Triggered by Thailand's decision to no longer peg its local currency to the US dollar (USD), a series of currency devaluations quickly spread to its neighbors and successfully destabilized the Asian economy as well as all world financial markets.

  • Dotcom bubble burst in 2000

The dotcom bubble occurred during a period of excessive speculation in Internet-related stocks.

NASDAQ stocks quintupled between 1995 and 2000, but by 2002, markets had fallen by more than 78%, giving back all the gains made during the bubble and resulting in the closure of many Internet startups.

  • 2007 Subprime Mortgage Crisis – 08

Cheap credit and lenient credit conditions led to the collapse of the US housing market.

The effects of the trickle-down were massive and led to the collapse of a former investment bank (Lehman Brothers), which consequently triggered the Great Recession, the worst economic crisis since the Great Depression of 1929.

  • The Flash Crash 2010

The May 6, 2010 Flash Crash only lasted about 36 minutes, but managed to wipe out over $1 trillion in value. The flash crash was caused by high frequency trading algorithms, but markets quickly recovered losses.

  • The Chinese Market Crash in 2015 – 16

After a period of excessive speculation, the retail-dominated Chinese stock market became overvalued and inflated, with prices rising on momentum rather than solid fundamentals.

The bubble burst in June 2015 and the markets lost more than 30% of their value in 3 weeks. The decline continued until February 2016.

  • COVID-19 of 2020

After a decade of prosperity following the Great Recession of 2008, a global health pandemic (coronavirus) inspired governments to institute closing restrictions and curfews that literally crippled economies.

As a result, the DJIA dropped over 26% in just 4 days in March 2020. Despite this, the markets recovered later that year.

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