What Can Past Stock Market Crashes Teach Us?
This isn't the first time the stock market has crashed and it won't be the last. Here is a brief history of past market crashes and what we can learn about the COVID-19 market crash.
The United States is currently in the throes of financial turmoil due to COVID-19, with the stock market crashing in early March. The coronavirus has affected everything from the job market to the stock market, and there is no clear end in sight. But this isn't the first time the stock market has seen dark days.
The stock market has faced challenges many times throughout the decades, including the Great Depression. Understanding the history of market crashes can help investors remain steady during this current tumult and is a good reminder that we will all get through this.
Timeline of Three Past Market Crashes
September 1929 — After years of stock price increases in the United States, stocks began falling. A month later, on Black Monday (October 28) and Black Tuesday (October 29), the Dow Jones Industrial Average (DJIA, aka “the Dow”) fell more than 25%, starting the Great Depression and years of steep unemployment in the United States.
October 2008 — Over a week, the DJIA fell 17% due to a crisis in subprime mortgage lending. And the S&P fell by nearly 19%. After 17 months, the U.S. stock markets lost over 50% of their value. This led to banks closing and started the Great Recession.
March 2020 — The DJIA lost 4,786 points throughout March due to the spread of the coronavirus. And it registered its worst quarter since 1987.
What Happened After the Drops?
- Black Monday and Tuesday in 1929 kicked off the most severe stock market crisis in the United States to date. The Dow lost 89% of its pre-crisis peak value over roughly 34 months.
- The Great Recession of 2008–2009 ushered in a market decline of 53% from highs over 17 months.
- Recent market movements caused by the coronavirus caused the Dow to lose 28% between February 11 and March 12. Since the virus is still without a vaccine, there is a possibility of more market disruption to come.
How Are Market Crashes Related to Recessions?
A market crash does not necessarily start a recession. The U.S economy is made up of much more than just the stock market. The economy comprises other things as well, including employment and unemployment rates, gross domestic product (GDP), and the rate of national consumption (how much we're all spending money).
By definition, a recession is two consecutive quarters of declining GDP. For some context, the U.S. GDP shrank by about 27% during the Great Depression. Throughout the Great Recession, GDP shrank by only about 5%.
A period of stock market drops doesn't equate to a recession. However, a prolonged declining market over the course of a few weeks can be an indicator that other parts of the economy are not doing well.
Coronavirus Effect on the Economy
Today, due to the coronavirus, many people cannot go outside their homes to shop and spend money. This means less consumer spending, and that businesses are less profitable. Some companies have even been forced to close due to state-issued lockdowns of nonessential businesses.
With businesses closing and making less money, they have less money to pay employees. That has resulted in many layoffs and people being furloughed from their jobs. This, in turn, means people have less income and are thus spending even less. It's a vicious cycle.
Now, this may seem far removed from the stock market, but it's actually closely tied in. When people spend less, companies that are publicly traded may post less in revenue. This affects their performance and profit levels.
Additionally, when people see that the market is down, it can spark a ripple of fear. Investors can lose confidence in the market, which could lead them to take their money out completely, switching from stocks to bonds, or even cause them to pause their investments.
How Did The Stock Market Recover After Crashing?
1929: The Great Depression was felt worldwide. At the time, there were not a lot of the safeguards that we currently have in both the investing and banking worlds. So the effect lingered. It took 25 years for the stock market to reach the highs it saw before the Depression began.
2008: After 2008, the stock market took less than four years to recover fully.
Today: Right now, the Federal Reserve has taken drastic action to prevent further market drops. So far. The U.S. government has released three fiscal stimulus bills that come with a variety of ways to help businesses and individuals through this pandemic.
It's impossible to say when the stock market will reach pre–COVID-19 levels. But Federal Reserve Chairman Jerome Powell says that he is ready and willing to take unprecedented actions to stabilize the economy and the stock market.
What Investors Can Do During This Crash
Each investor is different and has different goals, but there are some best practices for market crashes.
If you do not need to live off of your investments right now, try to keep your money in the stock market. Pulling money out will only negatively affect the market and could lock in a loss for you as the investor.
If you want to invest during a market drop, and are looking for individual companies, take a look at the stock market sectors that have been hit hardest by the virus. You might find great deals right now. Use self-directed stock brokers such as TD Ameritrade or Merrill Edge to buy stocks you see potential in.
For example, cruise ships have had a difficult time, and their values have decreased. That means you can grab some stock at a lower price and hold on to it. Other industries to consider buying right now include airlines, hotels, and travel agencies.
A good reminder for every investor is that there have been severe market drops and serious recessions before. What is happening right now isn't unprecedented. The U.S. survived the Great Depression and the Great Recession and the stock market remained intact each time. Remind yourself of that as you watch market fluctuations. It will help you weather the storm.