What can we learn from the last 6 Stock Market Crashes?

What can we learn from the last 6 Stock Market Crashes?

The history of stock market crashes in the United States dates back to the late 1700s. Over the years, there have been several notable stock market crashes, each with its unique causes and consequences. Here are some of the most significant stock market crashes in the history of the United States:


  1. The Panic of 1792: The first stock market crash in the United States was caused by speculation in the newly formed stock market.

  2. The Panic of 1837: A severe depression caused by land speculation and several banks' failure.

  3. The Panic of 1857: A severe recession caused by the failure of several banks and the collapse of the New York City real estate market.

  4. The Panic of 1873: A severe depression caused by over-investment in railroads and a subsequent credit crunch.

  5. The Panic of 1907: A severe recession caused by a cash shortage and a lack of trust in banks.

  6. The Crash of 1929: The most famous and devastating stock market crash in history, which marked the beginning of the Great Depression.

  7. The Crash of 1987: A sharp one-day drop in the stock market caused by a combination of factors, including program trading and portfolio insurance.

  8. The Dot-com Bubble: A speculative bubble in technology stocks that burst in 2000 and led to a bear market.

  9. The Financial Crisis of 2008: A severe recession caused by the collapse of the housing market and the failure of several large financial institutions.

  10. The 2020 Coronavirus crash: A sharp decline in stock markets and other financial markets caused by the global outbreak of COVID-19 and the economic disruption caused by it.

These crashes have had varying causes, and the severity and duration of the downturns have varied, but they all have had a significant impact on the economy and the lives of people. It is important to note that some of these crashes were caused by speculative bubbles, and others were caused by underlying economic and structural problems.


Let me discuss recent crashes and what we can learn from them.

 


1907 Stock Market Crash:


The 1907 Stock Market Crash, also known as the Panic of 1907, was a financial crisis that occurred in the United States in 1907. The crash was triggered by a combination of factors, including a lack of bank regulation, economic inequality, and a lack of trust in the banking system.


The Panic of 1907 began in October 1907, when a failed attempt to corner the market in copper shares led to a series of bank failures and a run on the stock market. The crisis was exacerbated by a lack of regulation of the banking system, which allowed banks to engage in risky practices such as insider trading and speculation. In addition, the concentration of wealth in the hands of a small number of individuals and companies made the economy vulnerable to a downturn.


The Panic of 1907 was a wake-up call for the government and led to the creation of the Federal Reserve System in 1913, which provided a more stable and regulated banking system. The Federal Reserve was created to provide an elastic currency, to act as a lender of last resort, and to help stabilize the financial system during periods of stress.


After the 1907 Stock Market Crash, the Federal Reserve Act was passed by Congress and signed into law by President Woodrow Wilson in 1913. The Federal Reserve System, also known as the Fed, was created as a result of this act. The Fed's primary responsibilities were to provide an elastic currency, to act as a lender of last resort, and to help stabilize the financial system during periods of stress.


The Fed was designed to be a central bank that would regulate the money supply and interest rates in order to stabilize the economy and prevent future financial crises. It was also given the authority to act as a lender of last resort, providing banks with the necessary liquidity to meet the demands of their customers during times of stress.


The Fed was also given the authority to supervise and regulate the banking system, and in 1914, it established the Federal Reserve Board to oversee the regional banks. The Fed also established the Federal Open Market Committee (FOMC) to manage the money supply and interest rates.


The Fed's actions after the 1907 crash helped to stabilize the banking system and prevent future financial crises. It provided a more stable and regulated banking system and helped to ensure that the economy would be protected from future financial crises. The Fed also helped to promote economic growth by providing banks with the necessary liquidity to meet the demands of their customers during times of stress.


What can we learn from this crash:


  1. The importance of bank regulation: The 1907 crash was exacerbated by a lack of banking system regulation, which allowed banks to engage in risky practices such as insider trading and speculation. This led to a series of bank failures and a run on the stock market. The creation of the Federal Reserve in 1913 helped to provide a more stable and regulated banking system.

  2. The need for a lender of last resort: The Panic of 1907 highlighted the need for a lender of last resort that could provide liquidity to the banking system during times of stress. The Federal Reserve System was created to act as a lender of last resort and help stabilize the financial system during periods of stress.

  3. The impact of economic inequality: The concentration of wealth in the hands of a small number of individuals and companies made the economy vulnerable to a downturn. This is an important lesson that today's economy should take into account, as it is essential to have a fair distribution of wealth and resources to have a stable economy.

  4. The importance of transparency and trust: The 1907 crash was also a result of a lack of faith in the banking system. The financial sector must be transparent and accountable to build trust and confidence in the system.

  5. The importance of diversification: The 1907 crash was triggered by a failed attempt to corner the market in copper shares, which led to a series of bank failures and a run on the stock market. Diversifying investments is important and not putting all the eggs in one basket, as it can help reduce risk and protect against market fluctuations.


1929 Stock Market Crash


The Stock Market Crash of 1929, also known as the Great Crash, was a financial crisis that occurred in the United States in 1929. The crash began on October 24, 1929, when the stock market, which had been experiencing tremendous growth and speculation, suddenly collapsed. Over the next three years, stock prices fell by more than 90%, and the country entered the Great Depression.


The crash was triggered by a combination of factors, including over-speculation in the stock market, economic inequality, and a lack of regulation of the financial system. Many investors had bought stock on margin, meaning they borrowed money from brokers to purchase shares, and when the market began to decline, they could not pay back their loans. This led to a chain reaction of margin calls and forced selling, further exacerbating the stock price decline.


The Great Crash profoundly impacted the economy and society, leading to widespread bank failures, unemployment, and a sharp decline in industrial production. It also led to a decline in consumer spending, as people were reluctant to spend money in the face of economic uncertainty. The depression lasted for more than a decade, and it was not until the onset of World War II that the economy began to recover.


After the Stock Market Crash of 1929 and the onset of the Great Depression, the Federal Reserve, under the leadership of Benjamin Strong, did not take aggressive actions to stabilize the economy and mitigate the effects of the depression. The Fed believed that the economy would self-correct and that the depression was a necessary adjustment period. However, the depression persisted and worsened the public and Congress.


In 1933, Franklin D. Roosevelt was elected president, and he quickly took steps to address the economic crisis. One of his first actions was to declare a national bank holiday to close all banks and assess their financial health. He also pushed through a series of reforms known as the New Deal, which aimed to stabilize the economy and provide relief to the unemployed and the poor.


One of the most significant actions the Fed took after the 1929 crash was raising interest rates to curb inflation, which led to a contraction of the money supply and a further economic downturn. This decision was later criticized as it worsened the public and congress.


The Fed also did not act as a lender of last resort as it had before and did not provide financial assistance to banks and businesses during the depression. This lack of action was seen as a major contributing factor to the length and severity of the depression.


What can we learn from this crash: 


  1. The importance of regulation and oversight: The stock market crash of 1929 was, in part, caused by a lack of regulation and oversight in the financial system, which allowed for excessive speculation and risky practices such as buying on margin. This highlights the importance of having proper rules in place to prevent such practices and protect investors.

  2. The dangers of buying on margin and using leverage: Many investors bought stock on margin, which means they borrowed money from brokers to purchase shares, and when the market began to decline, they could not pay back their loans. This led to a chain reaction of margin calls and forced selling, further exacerbating the stock price decline. This highlights the dangers of buying on margin and using leverage.

  3. The importance of economic stability and fair distribution of wealth: Economic inequality and a lack of stability contributed to the crash, as the concentration of wealth in the hands of many individuals and companies made the economy vulnerable to a downturn. Fair wealth distribution and resources are important to ensure a stable economy.

  4. The impact of consumer spending: The crash led to a decline in consumer spending, as people were reluctant to spend money in the face of economic uncertainty. This highlights the importance of consumer spending in driving economic growth and the need for policies that encourage consumer spending.

  5. The importance of a strong safety net: The Great Depression that followed the crash led to widespread poverty and unemployment, highlighting the importance of a strong safety net to help citizens weather economic downturns. Social safety net programs such as unemployment insurance and welfare were created during this time to help mitigate the effects of the depression.




1987 Stock Market Crash


The Stock Market Crash of 1987, also known as Black Monday, was a financial crisis that occurred on October 19, 1987. On that day, the Dow Jones Industrial Average, a stock market index that tracks the performance of 30 large publicly traded companies, lost 22.6% of its value in a single day. This was the most significant one-day percentage decline in stock market history.


The crash was triggered by a combination of factors, including a sharp increase in interest rates, a weak dollar, and a global economic slowdown. Many investors were also worried about rising inflation and a recession. In addition, the use of portfolio insurance, a financial product designed to protect investors from market declines, also contributed to the crash. When the market began to decline, portfolio insurance triggered a wave of selling, further exacerbating the stock price decline.


The crash significantly impacted the global economy, and many investors lost significant money. However, the market quickly recovered, and by the end of the year, Dow Jones had regained most of its losses.


After the Stock Market Crash of 1987, the Federal Reserve, under the leadership of Alan Greenspan, took several actions to stabilize the economy and mitigate the effects of the crash.

One of the most significant actions the Fed took was to cut the federal funds rate, which is the interest rate at which banks lend money to each other overnight. This action helped to ease the credit crunch and restore confidence in the financial system.


The Fed also provided liquidity to the market by lending money to banks and securities firms through its discount window, which is a lending facility that allows banks to borrow money from the Fed. This helped to ensure that the banks had enough money to meet the demands of their customers.


The Fed also worked closely with other central banks around the world to stabilize the global financial system. The Fed coordinated its actions with the Bank of Japan and the Bank of England to provide liquidity to the market and restore confidence in the financial system.


The Fed's actions after the 1987 crash helped to stabilize the economy and prevent a more severe financial crisis. The Fed's quick response and actions helped to ease the credit crunch, restore confidence in the financial system, and prevent a more severe recession. The Fed's actions also helped to demonstrate its role as a lender of last resort and stabilizer of the financial system.



What can we learn from this crash:


  1. The importance of understanding the risks associated with financial products: The use of portfolio insurance, a financial product designed to protect investors from market declines, contributed to the crash. This highlights the importance of thoroughly understanding the risks and limitations of any financial products before investing in them.

  2. The need to be aware of market conditions and global economic events: A combination of factors such as a sharp increase in interest rates, a weak dollar, and a global economic slowdown contributed to the crash, highlighting the importance of keeping an eye on market conditions and being aware of global economic events that may impact the stock market.

  3. The importance of diversifying investments: The 1987 crash highlighted the importance of diversifying investments to reduce risk. By spreading investments across different sectors, asset classes, and countries, investors can reduce their exposure to market fluctuations and protect themselves from significant losses.

  4. The need for efficient market regulation: The crash also highlighted the need for more efficient market regulation to prevent market manipulation and improve investor protection. It was noted that some investors had access to non-public information and used it to their advantage leading to market manipulation.

  5. The importance of having a plan: The sudden and sharp decline in stock prices caught many investors off guard without a plan for reacting. Having a plan in place for how to manage investments during market downturns can help investors make more informed decisions and potentially minimize losses.


2008 Stock Market Crash


The Stock Market Crash of 2008 was a financial crisis that occurred in the United States and spread globally, triggered by the housing market's collapse. The problem began in 2007 when the housing market, which had been experiencing tremendous growth fueled by risky lending practices such as subprime mortgages, suddenly collapsed. This led to widespread defaults on mortgages and a decline in housing prices.


The crisis quickly spread to the financial sector, as many banks and financial institutions had invested heavily in the housing market and were now facing significant losses. This led to a series of bank failures and a severe credit crunch, making it difficult for businesses and individuals to obtain loans.


The crash had a major impact on the global economy, leading to a severe recession with unemployment reaching 10% and housing prices falling by more than 30%. It also led to a decline in consumer spending, as people were reluctant to spend money in the face of economic uncertainty.


The Federal Reserve, also known as the Fed, took several actions in response to the 2008 financial crisis. Some of these actions include:


  1. Lowering interest rates: The Fed lowered the federal funds rate, the rate at which banks lend money to each other overnight, to near zero in December 2008. This made it cheaper for banks to borrow money and helped to stabilize the financial system.

  2. Providing financial assistance: The Fed provided financial assistance to troubled banks and other institutions through various programs. The Fed's lending facilities, such as the Term Auction Facility (TAF) and the Discount Window, provided short-term loans to banks and other eligible institutions. Additionally, the Fed made large-scale purchases of mortgage-backed securities and other assets to help stabilize the housing market.

  3. Implementing policies to stabilize the housing market: The Fed implemented policies to help stabilize the housing market and prevent foreclosures. One such policy was the Home Affordable Refinance Program (HARP), which helped homeowners refinance their mortgages even if they owed more than their home was worth.

  4. Congress passed the Emergency Economic Stabilization Act of 2008: This authorized the U.S. Treasury Department to purchase up to $700 billion in troubled assets from financial institutions to stabilize the financial system. This law created the Troubled Asset Relief Program (TARP) which provided funds to stabilize the financial system and prevent a complete collapse of the economy.

These actions by the Fed and the government helped stabilize the financial system, prevent a complete collapse of the economy and prevent a great depression.


What can we learn from this crash:


  1. The importance of proper regulation and oversight: The 2008 crash was, in part, caused by a lack of regulation and oversight of the financial system, which allowed for risky lending practices such as subprime mortgages. This highlights the importance of having proper regulations in place to prevent such practices and protect investors.

  2. The dangers of risky lending practices: The 2008 crash was triggered by the collapse of the housing market, which was fueled by risky lending practices such as subprime mortgages. This highlights the dangers of risky lending practices and the need for proper oversight of the lending industry.

  3. The importance of transparency and accountability: The 2008 crash exposed the lack of transparency and accountability in the financial sector, which contributed to the crisis. This highlights the importance of having transparency and accountability in the financial sector to build trust and confidence in the system.

  4. The importance of a strong safety net: The severe recession that followed the crash led to widespread poverty and unemployment, highlighting the importance of a strong safety net to help citizens weather economic downturns.

  5. The need for diversification: The 2008 crash also highlighted the need for banks and financial institutions to diversify their investments and limit their exposure to any one sector. This can help protect them from significant losses in case of a downturn in a specific market.


2010 Stock Market Crash Known As Flash Crash


The cause of the Flash Crash of 2010 is still debated, but it is believed to have been triggered by a combination of factors. One contributing factor was the use of high-frequency trading (HFT) algorithms. These algorithms, which many traders use to make rapid trades based on market data, can amplify market movements and make the market more volatile. The 2010 "Flash Crash" occurred on May 6th, 2010, when the Dow Jones Industrial Average (DJIA) dropped nearly 1,000 points, or about 9%, in just a few minutes, before recovering most of those losses. I 


 Additionally, the large number of orders generated by these algorithms can overwhelm the market's ability to process them, leading to a backlog of orders and delays in trade execution.

Another contributing factor was market manipulation by a single market participant, a high-frequency trading firm named Waddell & Reed. They placed a large sell order on E-Mini S&P 500 futures contracts, which is a derivative based on the S&P 500 stock market index, which may have triggered the crash.


In response to the Flash Crash, the Federal Reserve and other government agencies took several actions to address the underlying issues and prevent similar events from happening in the future. Some of these actions include:


  1. Review of market structure: The SEC and CFTC conducted a joint study of the market structure and issued a report that identified several factors that contributed to the Flash Crash.

  2. Circuit breakers: The SEC and CFTC implemented new circuit breaker rules that temporarily halt trading if the market drops too quickly.

  3. Increase in market surveillance: The SEC and CFTC increased their market surveillance efforts to better detect and respond to abnormal market activity.

  4. Changes in trading rules: The SEC and CFTC made changes to trading rules to reduce the risk of market disruptions.

  5. Increase in transparency: The SEC and CFTC increased transparency in the markets by providing more information to the public about market activity and prices.

  6. Limit up - limit down mechanism: To address the issue of sudden price movement, SEC implemented a new rule called the Limit Up-Limit Down mechanism. It prevents trades from occurring outside of a specified price band.

These actions helped to improve the stability and resilience of the markets, and the flash crash is seen as a one-off incident and not a systemic problem. The Fed did not have to take any actions directly as the crash was caused by structural issues within the markets and not due to macroeconomic issues.



What can we learn from this crash:


  1. The importance of robust regulations and oversight: The Flash Crash of 2010 highlighted the importance of having robust regulations and oversight in place to ensure market stability and protect investors.

  2. The need to address the impact of high-frequency trading: The crash also highlighted the need to address the impact of high-frequency trading on market stability, and the importance of implementing rules that require firms to have risk management systems in place and to take steps to prevent the spread of erroneous trades.

  3. The need for transparency and accountability: The crash exposed the lack of transparency and accountability in the market, particularly in the high-frequency trading sector. This highlights the importance of having transparency and accountability in the market to build trust and confidence in the system.

  4. The need for a quick response: The regulators and the Fed's quick response helped to minimize the impact of the crash and prevent a more severe financial crisis. This highlights the importance of having a plan in place and being able to respond swiftly in case of market emergencies.

  5. The importance of risk management: The flash crash also showed the importance of risk management in the financial sector. It's crucial that investors, traders, and financial institutions have in place proper risk management strategies and systems to minimize potential losses during market downturns.


The stock market crash of 2018 refers to the sharp decline in stock market indexes that occurred during that year. The S&P 500 and the Dow Jones Industrial Average (DJIA) both saw significant reductions, with the S&P 500 falling by 20% and the DJIA falling by 22%. The NASDAQ Composite fell by 26%. The market started to fall in September 2018 and reached its lowest point on December 24, 2018.


The causes of the crash were varied, but some of the main factors that contributed to the decline included concerns about rising interest rates, trade tensions between the United States and China, and signs of an impending economic recession. Additionally, the technology sector, which had been a major driver of the market's gains in previous years, saw a significant decline as investors became concerned about the valuations of high-flying tech stocks.


The crash of 2018 was not as severe as the 2008 financial crisis, but it had a significant impact on the stock market and on investor sentiment. Many investors saw large losses, and the market took several months to recover.


After the stock market crash of 2018, the Federal Reserve (Fed) took some actions to stabilize the market and support the economy. One of the main actions the Fed took was to lower interest rates. In December 2018, the Fed decreased the target range for the federal funds rate by 0.25% and then made several additional cuts throughout 2019. Lowering interest rates can help stimulate economic growth by making borrowing cheaper. It can also help stabilize the stock market by making investments in stocks and bonds more attractive relative to other types of investments.


The Fed also provided liquidity to the market by conducting repurchase agreements (repo operations) with banks and other financial institutions. These operations involve the Fed buying securities from banks in exchange for cash, which helps to ensure that banks have enough cash on hand to meet their customers' demands and keep the overall financial system stable.


Additionally, the Fed also announced that it would not be raising interest rates for a while, and it would be patient in determining future adjustments of interest rates.



What can we learn from this crash: 


  • Diversify your investments: Diversifying your portfolio across different asset classes (e.g. stocks, bonds, real estate) and different sectors can help reduce your risk and mitigate the impact of a market downturn.

  • Have a long-term investment strategy: It's important to remember that the stock market can be volatile in the short-term, but it has historically trended upward over the long-term. By investing for the long-term, you can weather short-term market downturns and take advantage of the market's overall upward trajectory.

  • Be aware of the risks: Be aware of the risks associated with investing in the stock market and make sure you understand the risks of the specific investments you're making.

  • Have a plan for managing risk: Have a plan in place for managing risk and be prepared to take action if the market starts to decline.

  • Avoid panic selling: In times of market volatility, it's important to avoid making hasty decisions. Don't sell your investments in a panic, instead, take the time to evaluate your options and make informed decisions.

  • Keep your emotions in check: Markets are subject to emotions and investors can be influenced by fear and greed. Try to keep your emotions in check and make decisions based on facts and not emotions.

  • Have an emergency fund: Have an emergency fund in place, so that you're not forced to sell your investments in a downturn just to meet your living expenses.

  • Be patient: Remember that the market may take time to recover, be patient and stick to your investment strategy.


The 2020 Coronavirus crash refers to the sharp decline in stock markets and other financial markets that occurred in response to the global outbreak of COVID-19, and the economic disruption caused by it. In response to the crash, the Federal Reserve and other government agencies took several actions to address the economic fallout and stabilize the financial system. Some of these actions include:


  1. Lowering interest rates: The Fed lowered interest rates to near zero in March 2020, which made it cheaper for banks to borrow money and helped to stabilize the financial system.

  2. Providing liquidity: The Fed provided liquidity to the financial system through a variety of programs. The Fed's lending facilities, such as the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF), provided loans to eligible corporations. Additionally, the Fed made large-scale purchases of Treasury securities and mortgage-backed securities to help stabilize financial markets.

  3. Supporting small businesses: The Small Business Administration (SBA) established the Paycheck Protection Program (PPP) which provided forgivable loans to small businesses to help them keep their employees on payroll during the pandemic.

  4. Supporting unemployment: The CARES Act, passed by Congress in March 2020, provided financial assistance to individuals who had lost their jobs due to the economic disruption caused by the pandemic.

  5. Supporting state and local governments: The CARES Act also provided financial assistance to state and local governments to help them cope with the economic disruption caused by the pandemic.

  6. Supporting households: CARES Act also provided financial assistance to households in the form of stimulus payments and unemployment benefits.

These actions by the Fed and the government helped stabilize the financial system and mitigate the economic impact of the pandemic. However, the situation continues to be dynamic and the Fed and the government continue to monitor the status and take actions as necessary (Jan 2023).


What can we learn from this crash:


  • Rapid spread of infectious diseases and pandemics can have severe economic consequences and can cause severe disruptions to the global economy.

  • The Federal Reserve and other government agencies have tools and mechanisms in place to stabilize the financial system and mitigate the economic impact of crises.

  • Lowering interest rates and providing liquidity to the financial system can help stabilize markets and prevent a complete collapse of the economy.

  • Government policies such as providing financial assistance to small businesses, supporting unemployment, supporting state and local governments, and supporting households can help mitigate the economic impact of a crisis.

  • The Emergency Economic Stabilization Act (EESA) and CARES act have been instrumental in providing economic support during the crisis.

  • Economic stimulus packages and support to workers, businesses and local governments are effective in mitigating the economic impact of a crisis.

  • The role of international cooperation and coordination in addressing global economic challenges is crucial.

  • It's important for the government and the private sector to be prepared for and respond quickly to crises in order to minimize the impact on the economy.

  • Diversifying the economy and having a robust healthcare system will be important for preventing and mitigating the impact of future crises.

Deepak Sharma

Deepak Sharma

Insurance Advisor / WealthGuard


  • My goal is simple, protect what is important to you. I focus my energy on discovering your exposure to risk and building a comprehensive plan to protect you against those risk.