As the finance profession dusts itself down from the pandemic-induced plunge of March 2020, WP looks at how it compares to other seismic market events

1. Wall Street Crash of 1929

The roaring 20s had led consumers to take on too much debt in the belief financial instruments would climb higher and higher. The decade had seen the stock market keep rising in a speculative spiral, while there was overproduction in factories.

Eventually, however, more experienced investors realized how hot the situation had got and began cashing out. Stock prices dropped on the 24th, briefly rallied, and then went into free fall on October 28-29. Ultimately, the market lost 85% of its value. 

While not the sole cause of the Great Depression, it highlighted and exacerbated huge underlying economic problems. Afterwards, a panicked rush to withdraw money caused banks to fail, depriving depositors of their savings, while businesses began to collapse, leading to scarcities of goods. Up to 25% of Americans ended up jobless, poverty was rife and migration common. GDP dropped 30% and the economic woe spread overseas, in particular to Europe.

The devastation resulted in legislation that separated retail banking from investment banking. The Federal Deposit Insurance Corporation (FDIC) was created to ensure bank depositor funds and the Securities and Exchange Commission (SEC) was established to oversee the stock market and protect investors from fraudulent practices. 

2. The “Black Monday” Crash of 1987

Market sentiment was pessimistic with oil prices sinking and U.S.-Iran tensions high. However, it was the role of new computerized trading programmes, which allowed brokers to place bigger and faster orders, that led to the market wipeout on October 19. This meant it was harder to stop trades quickly enough once prices started to drop. The Dow and S&P 500 each dropped more than 20% and Nasdaq lost 11%.

Fortunately, legendary trader Bair Hull helped get things back on track by putting in a large order for options at the Chicago Board Options Exchange on Black Monday.

The main casualty of the crash was consumer confidence but the scare was enough for the SEC to implement circuit breakers to halt trading for the day once a stock exchange declines by a given amount.

3. The Japanese Asset Bubble Burst of 1992

After Japan’s real estate and stock markets had flown to unprecedented heights in the 1980s, the spiral had become speculative by the decade’s end. In 1992, the bubble finally burst. The Nikkei index fell by nearly half, beginning a slow-motion Japanese recession.

There were never mass business closures but there was not much growth. Japanese investors, however, never fully regained their confidence in the stock market. The government installed subtle controls on its financial system but it took the market – and economy – decades to recover. The 1990s are known as “The Lost Decade” in the country.

4. The Dot-Com Bubble Burst of 2000

The previous decade had witnessed the internet revolution affecting both people’s professional and personal life. Companies with “.com” in their title surged – 12 large-cap stocks rose more than 1,000%. Investors tucked in oblivious to the fact that not every company tied to the World Wide Web could sustain its growth or formulate a viable business plan.

When they realized, the started to sell. By October 2002, the tech-heavy Nasdaq had fallen more than 75% from its March 2000 high. High-profile casualties included Pets.com, Toys.com, and WebVan.com, along with numerous other internet companies.

The crash resulted in the Sarbanes-Oxley Act of 2002, which was established to protect investors from corporate fraud. Investors were now alive to the risks and did better due diligence before putting more money into internet funds.

5. The Subprime Mortgage Crisis of 2007-08

Lenders practically gave money to under-qualified homebuyers and investors bought up mortgage-backed securities and other new investments based on these “subprime” loans. Eventually, burdened by debt, borrowers began to default, property prices fell, and the investments based on them nose-dived in value. In 2008 the stock market started to decline – and by early September, it was down almost 20%.

Big-hitters, like Bear Stearns and, infamously, Lehman Brothers, had invested heavily in real estate securities. They failed. Businesses couldn’t get loans because banks “didn’t know who to trust”, unemployment rose and the U.S. entered the Great Recession, which lasted until 2009 although the economic recovery remained sluggish for years. 

The federal government stepped in to rescue hobbled financial institutions, while the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 regulated swaps and other exotic investments. 

6. The COVID-19 Crash of 2020

The most recent and its effects are still being lived through. At the beginning of 2020, COVID-19 had spread widely in China and then to Europe — notably Italy — and then to the US and Canada, where restaurants and nonessential stores closed to stem the tide of infection.

Investors cottoned on to the extent to which the coronavirus could negatively affect the economy, and the stock market began to quiver. The S&P 500 index dropped 34%, 1145 points, at its peak of 3386 on February 19 to 2237 on March 23.

Businesses furloughed or laid-off workers and some shuttered forever. Restaurants were limited and travel restrictions kneecapped the airline and hotel industry. The human loss of the COVID pandemic has been devastating, with more than 300,000 deaths in the US and 1.5 million worldwide.

Huge government and central bank stimulus kept economies afloat. The long-term effects are as yet unknown.

James Burton
Wealth Professional – Senior Editor

Jul 30, 2021