In light of the recent stock market downturn, driven by global market instability, a disappointing jobs report, and the potential for future rate cuts from the Federal Reserve, investors may be concerned about the possibility of a market crash or recession.
While fluctuations in stock prices are common, stock market crashes are characterized by sharp declines in prices over a short period of time. The truth is that predicting stock market crashes is extremely difficult, if not impossible.
Here’s an overview of the current market situation, a look back at major stock market crashes, and tips to safeguard your investment portfolio.
Is the stock market crashing?
Recently, Japan’s Nikkei stock index experienced a more than 12 percent drop in a single day, marking its largest decline since 1987. This decline had a ripple effect on other global markets, including a significant drop in U.S. stocks.
Technically, the stock market may be heading towards a correction rather than a crash. A correction is generally defined as a decline of more than 10 percent but less than 20 percent, occurring at a slower pace than a crash. Corrections are seen as a normal part of a rising market and can even be beneficial.
It’s nearly impossible to predict and avoid stock market crashes and corrections as a long-term investor. Over the course of decades, you are likely to experience multiple market corrections, and possibly even a crash or severe bear market. On the flip side, you will also witness periods of strong growth or bull markets.
While it may be challenging to predict a financial crash, understanding the history of past crashes can provide valuable insights.
Key stock market crash statistics
- The largest single-day percentage declines for the S&P 500 and Dow Jones Industrial Average both occurred on Oct. 19, 1987 with the S&P 500 falling by 20.5 percent and the Dow falling by 22.6 percent.
- Two of the four largest percentage declines for the Dow occurred on consecutive days — Oct. 28 and 29 in 1929. The market fell roughly 25 percent over those two days.
- The Dow reached an all-time high in September 1929 before the crash and did not return to its pre-crash high until 25 years later in November 1954.
- From its peak in September 1929, the Dow fell 89 percent, bottoming in the summer of 1932 at 41.22, the lowest closing level of the 20th century.
- The six largest single-day point declines for the Dow all occurred in the first six months of 2020 as investors grappled with the impact of the COVID-19 pandemic.
- The largest single-day point decline for the Dow occurred on March 16, 2020 when the index fell 2,997 points, or 12.9 percent.
- The largest single-day point decline for the S&P 500 also occurred on March 16, 2020, falling 324.9 points, or about 12 percent.
Black Tuesday: Oct. 29, 1929
The stock market experienced steady growth throughout the 1920s, reaching a peak in September 1929, more than six times higher than its level in August 1921. The economist Irving Fisher famously claimed that stocks had reached a “permanently high plateau.” However, the market quickly proved him wrong.
The selling began on Thursday, Oct. 24, but the crash escalated on the following Monday and Tuesday, with the Dow dropping by 13 and 12 percent, respectively. By mid-November, the Dow had plummeted to nearly half of its September high, devastating investors and speculators alike.
Over the next few years, the market continued to decline as the economic challenges of the Great Depression took hold. The market hit rock bottom in July 1932, with the Dow closing at 41.22, down 89 percent from its pre-crash peak. It took until November 1954 for the market to surpass its September 1929 highs.
The 1929 crash occurred after a period of economic prosperity and technological advancement. The popularity of cars and telephones, as well as increased participation in the stock market by working-class families, fueled speculation and inflated stock prices to unsustainable levels. When the bubble burst, the stock market crashed.
Black Monday: Oct. 19, 1987
The 1987 stock market crash, also known as Black Monday, remains the largest single-day percentage decline in U.S. stock market history. On Oct. 19, the Dow plunged by 22.6 percent, a staggering drop of 508 points.
The crash was largely attributed to computerized trading programs, which bought more as prices rose and sold more as they fell. The widespread selling on Oct. 19 triggered panic among traders, leading to further selling as the market struggled to find stability.
Despite the severity of the crash, the market rebounded quickly, ending 1987 with a slight gain for the year. Less than two years later, the market had recovered all of its losses from the crash.
Dotcom bubble crash: 2000-2002
The 1990s saw strong economic growth, fueled by the emergence of the internet and optimism about its transformative impact on society. The Nasdaq Composite, heavily weighted towards tech companies, soared from around 1,000 to over 5,000 between 1995 and 2000. Companies unrelated to technology began adding “.com” to their names in a bid to attract investors.
However, the bubble began to burst in early 2000. Between April 2000 and January 2001, five of the Nasdaq’s 15 worst days occurred. On April 14, 2000, the index plummeted by nearly 10 percent, marking one of its biggest single-day declines at the time. By October 2002, the Nasdaq had lost nearly 80 percent of its value.
The unique aspect of this crash was that not all stocks were affected. Companies in the “old economy” with stable earnings saw their shares rise while tech stocks tumbled. For example, Warren Buffett’s Berkshire Hathaway and insurer Progressive saw their shares increase during this period.
Global financial crisis: 2008-2009
The housing market collapse in the U.S. triggered a financial crisis in the fall of 2008, prompting the government to intervene and rescue banks and financial institutions facing massive losses from subprime mortgages. While signs of trouble emerged in 2007, the stock market continued to rise until the severity of the crisis became evident in 2008.
During a tumultuous weekend in New York City, the U.S. government orchestrated the sales and rescues of financial institutions like Merrill Lynch and AIG to prevent their collapse. The stock market experienced extreme volatility, with sharp declines following news of government bailouts and rejection of initial rescue plans by Congress. Several days between late September and early December saw the S&P 500 lose between 7 and 8 percent in a single day.
As the economy deteriorated and the U.S. entered a severe recession, the market hit its lowest point in March 2009, with the S&P 500 plunging nearly 60 percent from its peak in October 2007. It took until April 2013 for the market to surpass its previous high.
COVID-19 pandemic: 2020
One of the most unprecedented stock market crashes occurred in March 2020 as investors grappled with the impact of the Covid-19 pandemic on the global economy.
On March 16, 2020, the Dow recorded its largest point decline ever, falling by almost 3,000 points or nearly 13 percent, marking the biggest single-day percentage drop since the 1987 crash.
After reaching an all-time high in February 2020, the S&P 500 plunged by 34 percent by March 23, one of the sharpest declines in history. However, interventions by the Fed and U.S. Treasury Department to support the economy and provide relief to those affected by the pandemic helped the market recover. By August, the market had reached new highs and continued to surge throughout 2023.
How to protect your portfolio in a downturn
While predicting market crashes is challenging, there are steps you can take to safeguard your investments during a downturn.
- Have the right mindset — Maintaining the appropriate mindset is crucial when investing in the stock market. For long-term investors saving for retirement, it’s important to understand that market downturns are part of the natural cycle of investing. Trying to time the market can often backfire, so focusing on long-term goals is key.
- Make regular contributions — If you have a workplace retirement plan like a 401(k), consider making regular contributions. This strategy, known as dollar-cost averaging, allows you to take advantage of lower prices during market downturns. By purchasing more shares when prices are low and fewer when prices are high, you can potentially improve your overall returns.
- Cash can be valuable — If concerns about a market downturn are weighing on you, holding a higher percentage of your portfolio in cash can provide a safety net. Cash reserves can protect you during market declines and give you the opportunity to reinvest at more favorable rates of return. However, it’s important to invest the cash when market conditions are conducive to growth, as cash holdings can drag down your overall investment performance over time.
- Avoid investing with borrowed money — While investing with borrowed funds can amplify returns, it also magnifies losses, especially during a downturn. While market downturns are a normal part of investing, using borrowed money can turn a regular downturn into a financial catastrophe. For most investors, avoiding margin accounts and investing only with available funds is a safer strategy.
— Bankrate’s Logan Moore and Rachel Christian contributed to an update of this story.