The 5 Biggest Stock Market Crashes

What It's About

When stock prices suddenly and broadly decline drastically due to investor panic it’s called a stock market crash. They often follow stock market bubbles, where assets are overvalued.

Remember the stock market crash of 2008? On September 29 of that year, the market plunged 777.68 points, a record at the time, and representing a drop of 7%. It’s still a day that many investors recall with horror, but the market had plenty of room left to fall before eventually moving higher.

Stock market crashes are like the earthquakes of the investing world. When a crash happens – usually unexpectedly – it sends tremors throughout the country, scaring professional investors all the way down to the proverbial widows and orphans. While any stock crash can leave a scar, most scars heal and investors can go on. But some market crashes leave scars that never fade.

Since Black Monday, the SEC has established circuit breakers that stop the market from trading after stocks have fallen a certain amount

A crash occurs when stocks drop precipitously and seemingly without warning, usually on a single day or a few days in succession. A crash often sets off a period of economic decline or recession, though not always. A crash may start a “correction” or “bear market.”

Don’t confuse a crash with these two related terms, correction and bear market. While all terms indicate a declining market, a crash is quick and short-lived. A correction, however, is a drop of 10% in the market from its recent highs, and usually lasts at least a few weeks, if not months. Meanwhile, a bear market is when stocks drop 20% or more from recent highs. Bear markets usually coincide with recessions, and they may last from a few months to many years.

It’s important to note, too, that analysts measure these terms by their percentage drop in the market, not by their point value. Nowadays you’ll often hear financial pundits bewail the market dropping 1,000 points. When the Dow Jones is 25,000 points, that drop is 4% – no small plunge – but it’s important to keep perspective on the percentage drop. If the market is 2,500, a drop of 1,000 points would wipe out 40% of its value. So as the value of the Dow Jones grows, the same percentage decline requires a bigger point move. Don’t get tripped up by big numbers.

Here are the five largest stock market crashes in U.S. history – how much the Dow Jones Industrial Average fell, what happened to cause the crash, and how long it took to recover. Three of the market’s five worst days ever occurred all within a ten-day period in 1929, the crash that kicked off the Great Depression, which lasted throughout the 1930s.

5. December 18, 1899

Amidst a series of banking panics, the Dow Jones Industrial Average – newly created in 1897 – crashed by 8.7% in a single day, the largest drop in the 19th century.

Why it happened

The U.S. had suffered a series of banking panics in the years leading up to this crash, resulting in a depression, a drop in silver reserves, and deflation. In 1899 speculation had driven up asset prices, and in the week leading up to the crash the suspension from trading of a few firms made investors especially jittery. Panic took over on the day of the crash.

How long it took to recover

From its close of 58 in 1899, the Dow Jones Industrial Average had recovered by 1900.

4. November 6, 1929

With a fall of 9.9%, November 6 was not even the worst day of the crashes that kicked off the depression. In fact, it was the third worst day and helped continue the punishing momentum that had already been established in the week prior.

Why it happened

Markets continued to panic after the devastating crashes of October 1929. Selling pressure and fear from days earlier continued unabated.

How long it took to recover

The Dow Jones Industrial Average didn’t reach the same plateau again for 25 years. Not until 1954 did the Dow hit its pre-crisis peak.

3. October 29, 1929

October 29 was the second punch in the Monday-Tuesday combo that launched the Great Depression. The day was nicknamed Black Tuesday, and it saw the Dow Jones decline a whopping 11.7% in just one trading session.

Why it happened

The day followed through on the panic that had begun on October 24, and it was the fifth day of the Great Crash, following up the worst day of the crash, Black Monday.

How long it took to recover

The Dow Jones didn’t hit its pre-crisis peak until November 1954.

2. October 28, 1929

October 28 – called Black Monday – wasn’t the first day of the Great Crash, but it was the most devastating. The Dow Jones Industrial Average declined a stunning 12.8%, walloping investors. And it was followed up immediately by the third-worst trading day ever, Black Tuesday.

Why it happened

Black Monday was the fourth day of the market train wreck. Several causes helped set up this crash, including a long period of prosperity and low unemployment in the 1920s that gave a sense of overconfidence, the availability of easy credit that allowed investors to speculate on stocks, and an abrupt increase in interest rates by a full percentage point in the weeks leading up to the crash. Then investors panicked.

How long it took to recover

The Dow Jones took more than 25 years to reach the same level as it had in October 1929.

1. October 19, 1987

The absolute worst single day occurred not as the lead-up to the Great Depression but as an unexpected blowout during an otherwise strong bull market. Known as Black Monday, the Dow Jones Industrial Average dropped an astounding 22.6% in a single day. The crash actually rippled across the world, beginning in Hong Kong before infecting European markets and then the U.S.

In one of the worst stock market events in history, the Dow Jones Industrial Average dropped over 22% on a single day

Why it happened

The U.S stock market had been on a solid bull run since 1982, which increased the valuations of stocks, but the critical factor was newly introduced automatic trading systems. When the market began to decline some, so-called program trades began to overwhelm human market makers, and markets spiralled downwards in a panic. As the market fell, even more orders rushed in.

Since then, the SEC has established circuit breakers that stop the market from trading after stocks have fallen a certain amount – a 15-minute stop after the market falls 7% before 3:25 pm and another 15 minutes if the market drops 13%. If the market ever falls 20%, it’s shut down for the rest of the day.

How long it took to recover

It took the Dow Jones Industrial Average only about 20 months after the crash to regain its pre-crash peak. Even though the market recovered relatively quickly, thanks in part to quick action on the part of the Federal Reserve to increase liquidity, this crash was so psychologically devastating that it’s still referenced today.

By Mackenzie O'Connor
Wealthbase Contributor

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