For as long as anyone can remember, people predicted the stock market would crash. The doomsday scenarios read in media headlines make it sound even worse. A company could have one bad day and end up on the front of the Wall Street Journal as an underperforming stock.
With the stock market growing alongside unemployment, your fears could be right. We could face a market crash. You already lived through one in 2020, and there were three others since 2000 if you include the dotcom crash that started the millennium.
The question for portfolio holders is how low could the stock market go?
The first thing to note is the market has historically recovered every time it has crashed. It’s “just” a matter of how much time it takes.
And some companies or industries tend to grow during crashes; just look at the emergence and growth of Uber (UBER) post 2008.
Let’s examine some market crashes to determine how bad they truly were. We’ll look at how much the market fell, what caused it, and how long it took to recover.
This should help us determine what we’re up against, starting with the granddaddy of them all – the crash that caused the Great Depression.
How Far Did The Stock Market Fall In 1929?
The stock market crash of 1929 was the most devastating in U.S. history, triggering a decade-long Great Depression. But before getting into how much it crashed, it’s important to understand how much it gained in the back half of the Roaring Twenties.
Each year heading into the market crash, stocks gained an average 9.4 percent. It was called the great Hoover bull market and somewhat emulates the Trump bull market of the late 2010s.
However, billions of dollars were invested on margin, causing a great speculative bubble. This happened as the Dow Jones Industrial Average reached a September peak of 381 points. That October, things went awry.
On Black Monday, October 28, 1929, the Dow dropped 12.8 percent. It lost another 12 percent the next Tuesday, closing at 198, a 183-point drop from the prior month. Major corporations at the time, like General Electric (GE), United States Steel (X), and Radio Corporation of America plummeted.
By the time it was done, the 1929 stock market crash eliminated about 90 percent of Wall Street’s value, and it took another 20 years for the Dow to pass 200 after a May 1930 fall. The economic recession worsened and became a depression that defined the generation.
But the cycle repeated time and again – the market would crash again in 1987, 1999, and most infamously in 2008.
The 2008 Crash: How Much Did The Market Fall?
The stock market crash of 2008 happened on September 29 of that year, and the DJIA dropped 777.68 points. It’s the largest point drop in history and by the time it was done, the market fell by over 50 percent.
Although the 1929 crash beats it in percentages, the point plunge made records at the time. And just like in the previous crash, the market had been on a historic bull run prior to the bearish trigger – the subprime mortgage crisis.
It wasn’t long before the Federal Reserve had to step in to save investment bank Bear Sterns. A government bailout program started with the U.S. Treasury Department spending an estimated $25 billion on shares of Fannie Mae (FNMA) and Freddie Mac.
Soon, Lehman Brothers, AIG, and Countrywide Home Loans fell, taking 3,000 points off the Dow Jones. The subsequent market crash was caused by predatory lending and no transparency in mortgage-backed securities.
The rise in defaults caused banks like Bank of America (BAC) to stay muted for much of the 2010s. However, some sectors continued to grow until the Flash Crash of 2015.
The Flash Crash Of 2015
Now that we have digital stock markets, many investors watch the market in real time. Even mobile apps like Robinhood enable this and cause a subsequent market run when retail investors see the same information and try to beat the market.
Because we monitor in real time, the term “flash crash” gained popularity over the past decade. These crashes can happen and rebound within minutes, and it’s not always clear exactly what causes this phenomenon.
The first flash crash happened in 2010, but two significant flash crashes occurred in 2015.
On March 18, 2015, the U.S. dollar’s exchange rate with the euro crashed. In under four minutes, futures fell by three percent, marking the largest price swing within five minutes in the past four years. It recovered just as quickly, but the S&P fell victim six months later.
August 24, 2015 marked a five percent flash crash within minutes of the market opening. It dropped from 1,965.15 to 1,867.01 and was caused by a mass sell-off pulling Buy orders from the Chinese Shanghai Composite Index, which fell by 8.5 percent.
This mass selloff was temporary, and the market corrected itself by the afternoon.
2020 Stock Market Crash
The 2020 stock market crash was caused by economic concerns over the fallout of the coronavirus pandemic.
This bear market caused global stocks to drop, and U.S. markets were hit throughout late February and early March. The S&P 500 dipped 9.5 percent on March 12 alone, the biggest fall since 1987.
It fell 12 percent before recovering and heading for a historic market high by year end. The Dow Jones reached its all-time high (for now) in November 2020. And this fuels bears believing it could go down.
There’s a good chance it will, but that doesn’t mean every company will. Industries like airlines and cruises will eventually return to operations. Can they overtake technology and healthcare stocks that ballooned in 2020?
Time will tell.
How Low Could The Stock Market Go? Conclusion
The stock market crashes every so often, and it can make or break fortunes when it does. Many high-profile investors have short positions ensuring that they become wealthy in the event of a black swan, or at the very least are well protected. This is what occurred with The Big Short we’re all familiar with from the book and movie.
For now, it’s best to focus on the long term. There’s no point in time in which the stock market didn’t gain over the course of 20 years. If you invest on the general market during a crash, the possibility to amplify your long-term gains is high if history is a precedent.
Just be careful – nobody is ever guaranteed to win. And the market could crash again.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.