Vasile Iliescu
Romania
2m
150 Years of Stock Market Crashes Today, let's talk about stock market crashes from the past 150 years. Though they varied in length and severity, the market always recovered and went on to new highs. When will the next bear market happen—and when it does, how long will it take to recover? Stocks were approaching bear-market territory as recently as Monday, April 7, and forecasters across Wall Street were raising the odds of a recession happening in 2025. It took the US stock market 18 months to recover from its most recent bear market—the downturn of December 2021, which was spurred by the Russia-Ukraine war, intense inflation, and supply shortages. On the other hand, the covid downturn of March 2020 was a much faster cycle. Though the initial drop was dramatic, the market ultimately recovered in just four months—the fastest recovery of any market crash over the past 150 years. So, what have we learned from these recent crashes? 1. It’s impossible to predict how long a stock market recovery will take. 2. If you don’t panic and sell your stock holdings when the market crashes, you will be rewarded in the long run. In the past 150 years there were 19 market crashes along the way, with varying levels of severity. However, 5 of them were quite severe. Let’s follow the path of $100 at the beginning of each market crash. 1. World War I and Influenza. After peaking in June 1911, markets soon started falling due to the breakups of conglomerates like the Standard Oil Company and the American Tobacco Company—and the worst part of this downturn began when World War I broke out in July 1914. The stock market continued to decline over the next few years (bringing that $100 investment down to a value of $49.04) and didn’t recover until after the 1918 influenza pandemic. 2. 1929 Crash and Great Depression. If you invested $100 in the stock market at the time of the 1929 crash, it would have declined in value to $21 by May 1932. This crash occurred when the post-World War I economic boom (which led to overconfidence, overspending, and overinflation of prices) was eventually no longer sustainable—a downturn from which the market took more than four years to recover. 3. Great Depression and World War II. The recovery from the first part of the Great Depression didn’t last long. Though the stock market recovered to its 1929 high by November 1936 (meaning that our investment had recovered to its $100 value, and even slightly ticked up to $100.23), it started declining again in February 1937. This next decline was largely owed to President Franklin Roosevelt’s changes in fiscal policy, including factors like the contraction in banks’ reserve levels and the Social Security tax, which compounded with the impact of World War II. The investment sank to $52.49 in March 1938, and eventually recovered to $104.88 by February 1945. 4. Inflation, Vietnam, and Watergate. In 1973, Middle Eastern members of OPEC imposed an oil embargo on the US, which led to severe inflation. On top of turmoil around the withdrawal of troops from Vietnam and political uncertainty after the Watergate scandal, this period saw a 51.9% stock market decline—which would have brought a $100 investment down to $48.13. It took more than nine years to recover from this downturn. 5. Lost Decade (Dot-Com Bust and Global Financial Crisis). The dot-com bust began when overinflated prices in internet and technology companies hit a breaking point, losing nearly all the gains they had previously made. A $100 investment in August 2000 would have declined in value to $52.76. Seven years later, the stock market had almost gotten back to its previous level ($95.25) when the housing bubble burst and mortgage-backed securities began experiencing losses, leading to the Great Recession (in which the investment declined in value to $46). Altogether, this 12-year period included a 54% decline. Since the path to recovery is so uncertain, the best way to be prepared is by owning a well-diversified portfolio that fits your time horizon and risk tolerance. Have a great weekend!
null
.