With recent fluctuations in the stock market caused by global market volatility, a disappointing jobs report, and the potential for future rate cuts from the Federal Reserve, investors may be concerned about the possibility of a market crash or recession.
While stock prices can fluctuate on a daily basis, stock market crashes are characterized by steep declines in prices over a short period of time. Predicting these crashes is extremely challenging, if not impossible.
Here is a current overview of the market, a look back at major stock market crashes, and tips for safeguarding your investment portfolio.
Is the stock market crashing?
Recently, Japan’s Nikkei stock index experienced a significant drop of over 12 percent in a single day, the largest decline since 1987. This decline had a ripple effect on other global markets, including the U.S. stock market.
Currently, the stock market may be heading towards a correction rather than a crash. A correction is defined as a decline of over 10 percent but less than 20 percent, occurring at a slower pace compared to a crash. Corrections are considered normal in a rising market and are often viewed as healthy adjustments.
Both stock market crashes and corrections are challenging to predict and avoid for long-term investors. It’s important to understand that investing in stocks for the long term may involve experiencing market corrections, crashes, and bull markets.
While predicting a financial crash is difficult, it can be beneficial to learn from past occurrences.
Key stock market crash statistics
- The largest single-day percentage declines for the S&P 500 and Dow Jones Industrial Average both occurred on Oct. 19, 1987 with the S&P 500 falling by 20.5 percent and the Dow falling by 22.6 percent.
- Two of the four largest percentage declines for the Dow occurred on consecutive days — Oct. 28 and 29 in 1929. The market fell roughly 25 percent over those two days.
- The Dow reached an all-time high in September 1929 before the crash and did not return to its pre-crash high until 25 years later in November 1954.
- From its peak in September 1929, the Dow fell 89 percent, bottoming in the summer of 1932 at 41.22, the lowest closing level of the 20th century.
- The six largest single-day point declines for the Dow all occurred in the first six months of 2020 as investors grappled with the impact of the COVID-19 pandemic.
- The largest single-day point decline for the Dow occurred on March 16, 2020 when the index fell 2,997 points, or 12.9 percent.
- The largest single-day point decline for the S&P 500 also occurred on March 16, 2020, falling 324.9 points, or about 12 percent.
Black Tuesday: Oct. 29, 1929
The stock market experienced steady growth throughout the 1920s, reaching an all-time high in September 1929, which was more than six times its level in August 1921. Despite economist Irving Fisher’s optimistic declaration that stocks had reached a “permanently high plateau,” the market soon corrected itself.
The selling began on Thursday, Oct. 24, but the crash intensified on the following Monday and Tuesday, with the Dow dropping by 13 and 12 percent, respectively. By mid-November, the Dow had plummeted to nearly half its September high, causing significant losses for investors and speculators.
As the Great Depression set in, the market continued its downward trend over the next few years. The Dow hit its lowest point in July 1932, closing at 41.22, down 89 percent from its peak before the crash. It took until November 1954 for the market to recover its September 1929 levels.
The 1929 crash followed a period of economic prosperity and technological advancements, with widespread adoption of cars and telephones. The rise in stock market participation by working-class families, often through margin accounts, contributed to speculation and inflated stock prices to unsustainable levels. The eventual burst of this bubble led to the crash.
Black Monday: Oct. 19, 1987
The 1987 stock market crash, known as Black Monday, remains the largest single-day percentage decline in U.S. stock market history. On Oct. 19, the Dow plunged by 22.6 percent, a staggering drop of 508 points.
The crash was largely attributed to computerized trading programs, which exacerbated the selling pressure. The algorithms amplified buying as prices rose and selling as they fell, resulting in a cascade of selling on Oct. 19. Some traders panicked, and the market struggled to find a bottom.
Despite the severity of the crash, the market rebounded relatively quickly, ending 1987 with a slight gain. Within two years, the market had regained all the losses from the crash.
Dotcom bubble crash: 2000-2002
The late 1990s saw strong economic growth, fueled by the emergence of the internet and optimism about its transformative potential. The Nasdaq Composite, heavily weighted towards tech stocks, surged from around 1,000 to over 5,000 between 1995 and 2000. Companies unrelated to technology appended “.com” to their names in hopes of capitalizing on investor enthusiasm.
However, the bubble began to burst in early 2000. Between April 2000 and January 2001, five of the Nasdaq’s worst days occurred, including a nearly 10 percent decline on April 14, 2000. By October 2002, the Nasdaq had shed nearly 80 percent of its value.
During this period, stocks in traditional, non-tech sectors that generated steady earnings saw their prices rise while tech stocks plummeted. Companies like Berkshire Hathaway and Progressive experienced stock price increases amidst the tech crash.
Global financial crisis: 2008-2009
The housing market collapse in the U.S. triggered a financial crisis in the fall of 2008, prompting government interventions to prevent the collapse of major financial institutions. Although signs of trouble emerged in 2007, the stock market continued to climb until the severity of the crisis became evident in 2008.
Government actions, including the rescue of institutions like Merrill Lynch and AIG, led to extreme market volatility. The stock market experienced sharp declines, with the S&P 500 losing significant value in a few days between late 2008 and early 2009.
As the economy deteriorated and the U.S. entered a severe recession, the market hit its low point in March 2009, with the S&P 500 plummeting nearly 60 percent from its peak in October 2007. It took until April 2013 for the market to surpass its previous high.
COVID-19 pandemic: 2020
One of the most unprecedented stock market crashes occurred in March 2020 as the Covid-19 pandemic unfolded, raising concerns about its impact on the global economy.
On March 16, 2020, the Dow experienced its largest point decline ever, falling by almost 3,000 points, or nearly 13 percent, the biggest single-day percentage drop since the 1987 crash.
Following its all-time high in February 2020, the S&P 500 plummeted by 34 percent by March 23, marking one of the sharpest declines in history. Government support and economic stimulus measures helped the market recover, with new highs reached by August and sustained growth through 2023.
How to safeguard your portfolio during a downturn
While predicting market crashes is challenging, there are steps you can take to protect your investments during downturns.
- Adopt the right perspective — Having the appropriate mindset is crucial when investing in the stock market. Long-term investors should focus on their retirement savings goals and understand that market downturns are part of the investment process. Trying to time the market can often lead to poor investment decisions.
- Regularly contribute to your portfolio — If you have a workplace retirement plan like a 401(k), making consistent contributions allows you to take advantage of lower prices during market downturns. Dollar-cost averaging enables you to purchase more shares when prices are low and fewer when prices are high.
- Consider the value of cash — Holding a portion of your portfolio in cash can provide protection during market downturns and offer opportunities to reinvest at more favorable rates. However, excessive cash holdings can hinder investment performance over time, so it’s essential to deploy cash strategically during downturns.
- Avoid investing with borrowed funds — While borrowing money to invest can amplify returns, it also magnifies losses during downturns. Market corrections are normal, and recovering from them is possible over time. However, leveraging investments with borrowed funds can lead to significant financial setbacks. It’s generally advisable to avoid margin accounts.
— Bankrate’s Logan Moore and Rachel Christian contributed to an update of this article.