Historical Stock Market Crashes

Stock market crashes have occurred regularly since at least the mid-18th century. The United States experienced roughly 20 stock market crashes during the 19th and 20th centuries. Stock market crashes can be defined as sudden severe declines in stock prices over a broad sector of the market. Often they are defined as overall price declines of at least 20%--or double-digit declines in a major stock market index--within a period of days.

What Causes a Stock Market Crash?

Stock market crashes usually result from a combination of economic, social, and psychological factors. They are driven by overreaction and panic selling among investors. Large crashes tend to occur after several major events. Stock market crashes are often associated with one or more of the following:

Recessions
Monetary instability
Political events such as war or the fall of a government
Speculative stock market bubbles

Stock market crashes often follow:

Prolonged periods of economic optimism and rising stock prices
Periods of higher-than-average price-to-earnings ratios
Periods of extensive margin debt and leveraging

Early U.S. Stock Market Crashes

Stock prices fell almost 38% in a market crash precipitated by the War of 1812.
The Bank War of 1835 and burst of a speculative bubble on May 10, 1837 resulted in a 47% drop in real stock prices, widespread bank failures and a five-year economic depression.
Between 1853 and 1859 wild speculation in railroad stocks led to a 53% drop in real stock prices. The Panic of 1857 spread from the United States to Europe, South America, and the Far East. Crashes in the 1870s and 1880s were also caused by the railroad boom.

The Civil War precipitated a market crash in 1863.
In 1892, a crash was precipitated by the free silver movement.
The crash of the New York Stock Exchange on May 17, 1901, resulting from a struggle for financial control of the Northern Pacific Railroad, led to the “rich man’s panic,” compounded by the assassination of President McKinley and a severe drought. Wall Street lost 46% of its value between 1901 and 1903.
During the world financial crisis of 1906 and 1907, real stock prices fell more than 20%.
The stock market crashed twice before and during World War I.

The Crash of 1929

The most famous historical stock market crash occurred on Black Tuesday, October 29, 1929, ushering in the Great Depression. Following almost a decade of robust economic growth and poor fiscal policies, stock prices soared and investors borrowed more to invest more. Then the economy contracted and panic set in. The Dow Jones Industrial Average fell 23% in two days.

The ticker-tape system and telephone and telegraph lines were overwhelmed, and chaos ensued as overextended investors attempted to liquidate their holdings. By November, the Dow had dropped 40% from its September high. When it finally bottomed out in July of 1932, the Dow had lost 89% of its value. The stock market did not fully recover for two decades.

The stock market crashed several more times over the subsequent decades. During the 1970s, rising oil prices precipitated crashes in stock markets the world over.

The Crash of 1987

The mid-1980s was another period of economic excess. The Dow grew from 776 in August of 1982 to a high of 2722 in August of 1987. Over this five-year period, the world’s 19 largest markets grew by an average of 296%. Nevertheless, the Crash of 1987 has never been explained.

On Black Monday, October 19, there were simply far more sellers than buyers. As prices careened downward over the course of the day, investors panicked. The Dow dropped 22.6%. The S&P 500 index dropped 20.4%.

The NASDAQ was so deluged with sell orders that the system failed. In a matter of hours, the U.S. market lost almost a quarter of its value. Worldwide, 19 of 23 major industrial countries experienced declines of more than 20%. Hong Kong was the worst hit with a drop of 45.8%.

By early 1988, the markets had stabilized, economic growth returned, and corporate profits began to rise. In less than a year, the market had regained its lost value.