The stock market can be a place where wealth grows exponentially, but it also has its own risks. At times, the risk arises when the market drops suddenly and sharply. This can create panic among the investors. These sudden drops are termed stock market crashes. Continue reading to learn all about the biggest stock market crashes in the history of the USA.
Biggest Stock Market Crashes in the History
Recently, the stock market has faced significant challenges. Factors such as global market instability, poor job reports, and the potential for the Federal Reserve to cut interest rates have made investors tense. These worries have led to a decline in stock prices. There is also a possibility of a crash or even a recession due to this. In chronological order, the following stock market crashes have been explained. Continue reading to learn all about them.
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Black Tuesday, October 29, 1929
One of the most well-known stock market crashes occurred on October 29, 1929. This is known as the Black Tuesday in the history of stock markets. Throughout the 1920s, the stock market seemed to be booming. Many investors believed it would continue to rise. The market reached an all-time high in September 1929, but strangely after that, it began to fall. The sale started on October 24, but the crash intensified on Monday and Tuesday. During those days, the Dow Jones Industrial Average dropped by 13% and 12% respectively. By mid-November, the Dow had lost almost half its value compared to its September gains. This crash indicated the beginning of the Great Depression. This was known throughout the world as one of the hardest economic crises. The market did not recover until 1954. Some believe the reason for the crash was due to speculation, where many investors borrowed money to buy stocks, hoping to make quick profits. When prices fell, they were forced to sell the shares to repay their loans. This only drove their prices lower.
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Black Monday, October 19, 1987
Another unexpected stock crash occurred on October 19, 1987. This was known as Black Monday. On this day, the stock market experienced the largest single-day percentage drop in U.S. history. The Dow fell by 22.6% or 508 points here. However, unlike the 1929 crash, the 1987 crash was somewhat secluded. Concerns over the U.S. trade deficit and tensions in the Middle East accelerated the decline. However, the main reason was computerized trading. These trading programs sold more stocks as prices fell. This created tension that led to more selling of the stocks. However, in this case, the market recovered quickly. By the end of 1987, the stocks were on the way to recovery. Some gained back their losses, and within two years the market had fully recovered.
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Dotcom Bubble Crash, 2000-2002
The late 1990s saw a rise in technology stocks. This led to the dotcom bubble. Investors were excited about the Internet and its potential for new technologies. The Nasdaq Composite Index grew from 1000 in 1995 to 5000 in 2000. However, in the early 2000s, the bubble burst. The Nasdaq experienced some of their worst days ever. There were significant declines in value. By October 2002, the index had lost nearly 80% of its value. However, all the stocks were not affected equally. While tech stocks dropped, some companies in the “old economy” carrying stable earnings saw a rise in their shares.
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Global Financial Crisis, 2008-2009
The Global Financial Crisis was accelerated due to the collapse of the housing market. In the years leading up to the crisis, banks had issued many risky mortgages. This led to essential losses when homeowners defaulted on their loans. In 2007, the stock market started showing signs of losses. It then continued to rise until 2008, when the situation worsened. In September 2008, the government had to step in and rescue major financial institutions like Merrill Lynch and AIG. At that time, the market was highly volatile. The S&P loss was between 7% to 8% on many such days. By March 2009, the market was at its lowest. The S&P 500 was down nearly 60% from its peak in October 2007. Until April 2013, the market had not come back to its previous high.
Also read: Palantir Stock (PLTR) Soars 370% in 2024
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COVID-19 Pandemic, 2020
In March 2020, the stock market faced its biggest crash as the world was affected by COVID-19. As the reality of the pandemic slowly unfolded over the years, investors grew worried about its effects on the stock market. On March 16, 2020, the Dow fell nearly 3000 points. This was the largest drop ever. From February 19 to March 23, the S&P 500 dropped by 34%. However, as the Federal Reserve and the U.S. Treasury stepped in to support, the economy started to recover. By August 2020, the market reached a new high and continued to soar for much of 2021.
Ways to Protect a Portfolio in a Downturn
While stock market crashes are difficult to predict, one can take the following measures to ensure there is less risk.
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Right Mindset
If one is investing for the long term, then one must understand that market crashes are normal. It is best to focus on long-term goals rather than trying to time the market.
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Regular Contributions
If an individual has a retirement plan such as 401(k), contributing regularly can aid in taking advantage of lower prices during a crash. This practice is termed dollar-cost averaging. This means that investors buy more shares when prices are low and fewer when prices are high.
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Hold Cash
If an individual is worried about a crash, they may keep a portion of their portfolio as cash. This cash can protect them as prices fall and allow them to reinvest when opportunities arise. However, it is important to remember that cash can drag down one’s overall investment performance over time, so it is essential to invest wisely when the market stabilizes.
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Avoid Borrowing to Invest
Investing with borrowed money could amplify the gains. However, it can also lead to significant losses during a crash. If one invests with borrowed money, during a crash they may find it difficult to repay or handle their finances.
