6 Of The Biggest Stock Market Crashes And Financial Bubbles In History
Stock market crashes are three words that scare investors and can change the course of a country’s economy.
Typically, a stock market crash is seen as a single trading day in which a stock exchange or market drops by at least 10 percent. For stock traders, however, a stock market crash is “anytime there’s suddenly a lot of volatility that makes you wonder whether the world is coming to an end tomorrow,” said Terry Marsh, a finance professor emeritus at Haas School of Business at the University of California Berkeley.
The U.S. stock market ended 2020 at an all-time high, making the rich richer. This happened despite the market tanking early in a pandemic that has killed more than 485,562 people in the U.S. and left millions hungry and without jobs.
Based on the market volatility of the past year, many economists are predicting a correction in 2021 or wondering if there will be a stock market crash.
Jeremy Grantham, the long-term stock-market skeptic and investment strategist, predicts that the epic stock bubble we’re in could burst as soon as the spring or early summer with the broad rollout of the coronavirus vaccine. There has “never been a great bull market that ended in this kind of bubble that did not decline by at least 50 percent,” Grantham told CNBC’s “Squawk Box Asia”
Here are six of the biggest stock market crashes and financial bubbles in history.
1. 2008 Subprime Mortgage Crisis
From 2007 to 2008, real estate was the hottest commodity around. Greed was fueling the bubble before it burst. Eager to get as many commissions as possible, mortgage lenders were giving money to underqualified homebuyers. Because of the furry of real estate buys, investors snapped up mortgage-backed securities and other new investments based on these “subprime” loans.
The underqualified borrowers became burdened by debt and began to default on their loans. This led to a price decrease in property and the investments based on them nosedived in value. When Wall Street took notice, the stock market started to decline in 2008. By early September 2008, it had dropped almost 20 percent. On Sept. 15, the Dow Jones Industrial Average plummeted nearly 500 points.
The stock market crash had international ramifications — Japan’s stock market index, Nikkei dropped almost 10 percent on Oct. 8, 2008, Business Insider reported.
2. Internet dot-com bubble 1995-2001
The dom-com bubble burst after the tech frenzy of the 1990s. Investors were throwing money at almost any company with dot-com after its name. But “not every company tied to the World Wide Web could sustain its growth,” Business Insider reported.
The stock market crash saw the Nasdaq index, which had increased five-fold between 1995 and 2000, drop from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct 4, 2002 — a 76.81 percent drop, Investopedia reported.
Numerous tech companies went out of business, and larger, blue-chip tech companies were damaged.
3. 1998 Asian financial crisis
The Asian financial crisis was triggered in July 1997 and took hold by 1998. Initially, the crash was considered a localized currency and financial crisis in Thailand but it soon spread to other Southeast Asian countries, including Malaysia, Indonesia, and the Philippines, PBS reported. By the fall of 1997, the crisis had reached South Korea, Hong Kong, and China.
What followed was a global financial meltdown. By 1998, Russia and Brazil witnessed their economies enter a free-fall, and international stock markets from New York to Tokyo experienced record lows.
It all started because Thailand had borrowed too many U.S. dollars, causing its baht currency to collapse on July 2, 1997, dropping 20 percent in value.
“Currency in other Asian countries, including Malaysia and Indonesia, tumbled as well,” Business Insider reported.
4. 1987 Black Monday crash
“Black Monday” was infamous. It was considered the worst stock market crash in history.
The drop in oil prices and U.S.-Iran tensions negatively affected the market. However, what led to the stock market crash on Oct. 19, 1987 “was the relatively new prevalence of computerized trading programs that allowed brokers to place bigger and faster orders,” Business Insider reported. Because of this hyperspeed trading, it was hard to stop trades fast enough once prices started to decrease.
The Dow and S&P 500 each dropped more than 20 percent and Nasdaq decreased 11 percent. International stock exchanges also fell drastically.
5. Japan’s Lost Decade, 1986-1992
Real estate and stock markets were rising to unprecedented heights in Japan in the 1980s. A spiral soon followed and in 1992, the bubble of inflated real estate and stock prices finally burst. It was dubbed “The Lost Decade” in Japan.
The Nikkei index dropped by nearly half. Japan when into a mild recession. As a result of the crash, the Japanese government placed some controls on its financial system.
It took decades for the Japanese stock market to recover, said Tyler Muir, an associate professor of finance at UCLA Anderson School of Management, according to Business Insider.
Japan’s lost decade was mainly spurred by speculation during a boom cycle.
“Record-low interest rates fueled stock market and real estate speculation that sent valuations soaring throughout the 1980s. Property and public company valuations more than tripled to the point where a three-square-meter area near the Imperial Palace was sold for $600,000,” The Balance reported.
Realizing the bubble was unsustainable, the Bank of Japan increased interest rates to try and stop the speculation. The move, however, led to a stock market crash and debt crisis, as borrowers could not make payments.
6. 1929 Wall Street crash
The Wall Street Crash of 1929 happened after a speculative spiral. Over nearly a 10-year period, the stock market had been rising.
Listen to GHOGH with Jamarlin Martin | Episode 73: Jamarlin Martin Jamarlin makes the case for why this is a multi-factor rebellion vs. just protests about George Floyd. He discusses the Democratic Party’s sneaky relationship with the police in cities and states under Dem control, and why Joe Biden is a cop and the Steve Jobs of mass incarceration.
“Overproduction in factories and a Roaring 20s giddiness led consumers to take on too much debt and believe financial instruments would climb perpetually higher,” Business Insider reported. Veteran investors started cashing out, causing prices to drop first on Oct. 24, 1929. The stock market rallied briefly before going into a free fall on Oct. 28 and Oct. 29. The Dow Jones Industrial Average dropped 25 percent. The market lost an incredible 85 percent of its value.
What resulted were government reforms and new legislation, including the Glass Steagall Act of 1933 which separated retail banking from investment banking. This led to the formation of the Federal Deposit Insurance Corporation (FDIC) to insure bank depositor funds. Also, the Securities and Exchange Commission (SEC) was created to supervise the stock market and protect investors from fraudulent practices.
The economy went into the Great Depression in 1929, but the depression wasn’t entirely due to the stock market crash.”The Crash of 1929 didn’t cause the ensuing Great Depression, but it served as a wake-up call to massive underlying economic problems and exacerbated them. A panicked rush to withdraw money caused overextended banks to fail, depriving depositors of their savings,” Business Insider reported.