You’ve probably heard before that those who do not learn from history are doomed to repeat it.
This saying holds true for many things, including investing.
Looking back at stock market crashes in history provides a unique window into what causes the stock market to crash, helping us predict when the next crash might take place.
Let’s take a look at some of the most famous market crashes throughout history and what we can learn from them.
The Biggest Stock Market Crashes in History
1. The Wall Street Crash of 1929
The stock market began right around 1600, and the first stock market crash was soon to follow. However, the Black Tuesday stock market crash that took place in 1929 remains the worst stock market crash in US history.
So, let’s talk about it.
What happened: Over a four-day period, the Dow Jones dropped 25% and lost $30 billion in market value – the equivalent of $396 billion today. It was this crash that kicked off the Great Depression in the United States.
Experts agree that the cause of this crash was largely due to over-optimistic investors.
Just a few years prior to the crash, margin investing was invented, allowing investors to borrow money to buy stocks. This ability combined with a strong bull market led almost everyone to invest without caution, causing the market to rise about 20% a year from 1922-1929. When signs of a bear market started showing, though, the panic was swift and devastating.
What we learned: The danger of over-optimism in a bull market is the primary lesson that can be learned from the Black Tuesday crash. When investors trust the strength of the market without caution, the results are never good.
2. The Stock Market Crash of 1987
What happened: Another one of the biggest stock market crashes in history occurred on October 19, 1987, when the Dow shed 22% in a single day, ending a five-year bull market. It was a drop that came out of nowhere, and experts are still largely in disagreement about what caused the stock market crash.
While there were some ominous signs such as slowing economic growth and rising inflation, there was nothing in the economic climate that would have predicted such a sudden and significant drop.
Surprisingly, the crash only lasted one day, and the market soon climbed back to its highs. However, investors were still left badly shaken by the sudden crash.
What we learned: What the Black Monday crash teaches us is that the market is a fickle beast, and sometimes crashes are almost impossible to predict. It does, however, also teach us a more optimistic lesson as well – the market tends to recover quickly from even the most dramatic crashes.
3. The Tech Bubble Crash of 1999
What happened: The 1990s were a period of rapid technological development, and the commercialization of the internet caused valuations of internet-based companies to soar.
Investors excited about the potential of investing in the “next big thing” threw their money into any company that had “.com” after it without abandon.
However, the hard lesson they soon learned was that most of these companies were doomed to fail.
In March of 2000, large companies began placing sell orders on their tech stocks, causing a panic that led to a 10% drop in the market within a few weeks.
By 2001, the majority of new tech companies – no longer propped up by investor money – disappeared from existence, causing hundreds of millions of dollars of investor money to go to zero.
What we learned: The importance of carefully evaluating a company you’re going to own – no matter how trendy they might be – is the primary lesson we can learn from the tech bubble crash.
Had investors taken more time to assess these company’s fundamentals, including the management, the moat, cash flow, and other factors rather than blindly hoping they were investing in the next big thing, much of the pain of the tech bubble bursting could have been avoided.
4. The Housing Market Crash of 2008
What happened: This is one you probably remember — the housing market collapse of 2008. Over the course of 2008, the Dow fell almost 34%, and it wasn’t until early 2009 that it began to climb again.
As the name suggests, it was the real estate market that led to this collapse.
However, the exact factors at play are complex, and economists disagree over whether the banks or the Fed share more responsibility for the crash.
What we do know, though, is that financial institutions were taking on risky loans thanks to declining foreclosure rates and the fact that the Federal Reserve Bank was keeping the federal funds rate below 2%.
Once real estate prices began to drop and the federal funds rate began to rise, credit in the US froze, leading to an economic collapse.
What we learned: The lesson behind the housing market collapse is that companies are often affected by factors outside their control, meaning that investors must keep an eye on all economic conditions. The real estate market and the stock market are two entirely different markets, yet the collapse of one quickly led to the collapse of the other.
Nevertheless, most high-quality companies survived the crash and soon went on to climb to the highs we see today.
5. The Stock Market Crash of 2020
What happened: This leads us to our most recent example: the stock market crash of 2020, which disrupted a ten-year all-time-high bull market. Though the crash was largely due to the impact of the coronavirus, many weaknesses within the market built up for years, creating a massive stock market bubble.
That being said, it doesn’t take much for a market to crash. It only requires a specific set of circumstances to manifest within the economy.
And manifest they did. By April 2020, unemployment climbed to 14.8%.
By May, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was introduced as a way to help Americans struggling with the financial fallout from the pandemic. Even better, though, this $2 trillion stimulus package resulted in huge gains for active and retired investors.
Current investors had a few options at their disposal. They were allowed to deposit their stimulus check into a low-cost exchange-traded fund to maximize benefits or add the money to an IRA account. By adding the money to an IRA, investors opened the door to more opportunities to purchase mutual funds or other investments while the market was down.
Retired investors also received a break on required minimum distributions as a result of the CARES Act. This applied to traditional and individual retirement accounts and gave individual portfolios the chance to recover if a big dip in the stock market contributed to major losses.
All in all, the CARES Act gave the economy a needed boost in a time of crisis, however, the pandemic’s long-term effect on the stock market remains unclear.
What we learned: Even though you may have heard people say this market is unlike anything we’ve seen before, the truth of the matter is…yes and no. Market crashes don’t unfold all at once. Everything that occurred during the most recent stock market crash in 2020 was a reflection of previous stock market crashes in history.
As we continue to learn how to invest during a pandemic, we will see the stock market bubble up again as the Federal Reserve steps in to make positive changes and tumble as bad news surfaces. Issues related to bankruptcy and unemployment will also persist until the market recovers.
In addition, with this new Democratic Congress, you can expect more market fluctuation as taxes on corporations and wealthy individuals increase and we begin to see a unified push for national healthcare.
Stock Market Predictions
As the hopes of ending the pandemic inches closer with each vaccine that is distributed, investors should be prepared for anything. Predictions for the remainder of the year are obscure, but a few things are certain.
One of the biggest determinants that you can use to predict whether or not the stock market will crash is the past. Turn to previous examples of market crashes for evidence of what happened and why it happened.
The good news is you’ve already started your research by reading this post. Continue to rely on history as your trusted guide to learning more about the present market.
And on one final note – always remember to take your time and be patient. Sometimes, the best course of action is to hold back, and instead, wait to see how the market trends.
Learn from the Worst Stock Market Crashes in History
If you’re worried about stock market crashes, odds are you need to learn a little bit more about how to invest. This Stock Market Crash Survival Guide will help you prepare for the next market crash and help you cash in when the market drops!
Editor’s Note: This post was updated in 2021 with additional information on the 2020 stock market crash and more details on the future of the market.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.