What Can Past Stock Market Crashes Teach Us?

Daniel Penzing
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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.

Have you ever wondered why there seem to be market crashes at regular intervals? This is not the first time we have seen these levels and it won’t be the last time we see them again. Here is a brief history of past market crashes that show how crashes go in cycles.

The market is a trustless entity and traders follow the trends. When the government regulates valuations, the market is able to make the golden egg lay faster. This gives birth to the initial conditions of the 2017 COVID-19 cryptocurrency market crash.

Learn to join the herd without being swept off your feet. Traders are always looking for ways to get on the bandwagon of a winner without doing the leg work. This is the process that takes a stock from a penny stock to a blue-chip stock.

The COVID-19 market crash can also be explained by economies and the business cycle. All stock markets are based on economies. Markets have their drop cycles and their peaks. We have been near peak the entire year and now we are in a free fall.

I have found that the S&P 500 is still in a bullish mode and the Nasdaq is still in a bearish mode. We can see that the S&P 500 has dropped 47.7% from its peak on Jan 26, and its current level is -10.23%.

Timeline of Three Past Market Crashes

  • The market crashes of 1929 and 1987
  • Despite the technical difference, the stock market crash of 1929 and the market crash of 1987 are commonly referred to as “Black Monday.”
  • The Great Depression and the Great Recession
  • The Great Depression was a severe worldwide thypothesis that lasted from the late 1920s to the early 1940s. During this time, stock markets crashed, a recession occurred, unemployment skyrocketed, and 9 billion people had lost their “life savings”.
  • The Great Recession was a worldwide economic downturn that lasted from the year 2007 to the year 2009. During this time, stock markets crashed, a recession occurred, poverty spread rapidly, unemployment jumped to over 9%, and large concerns were encountered.

What Happened After the Drops?

As a reminder, the worst day in Wall Street history is Black Monday, where the Dow Jones Industrial Average (DJIA) fell more than 20% on October 19, 1987. The DJIA dropped some 508 points, or 22.6% from its high, and would fall another 22% by the end of the following year. Relative to the DJIA’s history, this crisis was a blip on the screen.

However, other well-known crashes, like the failure of the Long-Term Capital Management Fund in 1998 and the stock market crash of October 19, 1987, also resulted in serious economic doldrums.

It took the U.S. economy nearly 5 years to return to its pre-crash levels, and nearly 10 years for the economy to reach those pre-1987 heights. In the 10-plus years following Black Monday, the DJIA actually lost ground:

But the stock market wasn’t the only financial market that suffered a collapse after the 2000 Dot-Com Bubble. Stocks weren’t the only asset negatively affected by the crash. The market collapse affected other financial markets as well, driving everything from bonds to commodity prices, assets, and condo prices down.

Although there isn’t an exact correlation, you can expect a market crash (defined in part by a significant drop in stock prices in a short amount of time) to set off a recession.

Let’s use the 1929 Wall Street crash as an example. During the 1920s, the United States and the rest of the world experienced an economic boom, which was leading by a rise in stock prices thanks to the emerging popularity of the automobile. Many investors took advantage of this and started buying more stocks. But 1929’s Wall Street crash led to a massive sell-off, which led to an economic recession.

Coronavirus Effect on the Economy

The SARS Virus, which is a member of the Coronavirus family, is responsible for the recent economic downturn. Coronaviruses include Severe Acute Respiratory Syndrome or SARS, and they are responsible for 400 to 1,200 deaths each year in the United States.

First of all, we do not know for sure whether the Coronavirus is a major contributor to the economy. Some scientists have claimed that this virus caused the economic downturn. However, here are the facts. The first reports of the Myssi Virus started at the end of February. Although the media claims that the reports about the virus started to grow in March, it is probable that the virus was already spreading all over Malaysia, Singapore, and China.

When the media does not report on something, it does not mean that the virus is not spreading. For example, the media covered Jenin. However, that does not mean that there were not terrorist attacks elsewhere, because there were. The same could be said for the economic downturn. Just because the media has not reported on the SARS effects on Malaysia, Singapore, and China does not mean that they have not been impacted.

How Did The Stock Market Recover After Crashing?

Crazy as it may seem, it is true that the stock market does sometimes crash. It seems that whenever a crash happens, the media tends to paint a very gloomy picture. You’ve probably read stories about how the crash wiped out everyone’s savings and made everyone who invested lose their life savings.

For example, think back to the stock market crash of 1929. That one was caused by the Great Depression, but there have been other crashes since 1929. Here are a few of them.

1987 Black Monday – The stock market lost 22.6% of its value in one day.

2000 Tech Wreck – This topped the 1987 crash by losing 22.6% of its value in one day too.

2001 Recession – The cost of the stock market fell by 9.1% while the recession was taking place.

2008 Great Recession – The market lost 57% of its value during this recession.

2015 Correction – The correction took the market down by 5.7% during a period of ten days.

What Investors Can Do During This Crash

Remember, the last time it happened was nearly 90 years ago.

If this is the worst stock market crash since 1929, what should investors expect during it? What will they have to go through to weather the storm? What will they do to keep their profits protected and how can they preserve capital?

This article is going to provide some answers. We’ll look at five major stock market crashes that happened during the previous century. We’ll see how the crashes all started, what caused them, and see how the aftermaths played out.

The results might surprise you, for this research provides some eye-opening observations.

We’ll look at the 1800s, which was a tumultuous time for the global economy. We’ll look at what happened after a stock market crash in 1869 and after another one in 1872. In the first case, after a bear market, stocks recovered and went even higher in the future. In the latter case, however, futures prices never fully recovered.

We’ll also look at the Roaring Twenties, which aren’t as roaring as you might think. We’ll look at the crash in 1929 that started on a nice Thursday and not on a Black Friday.