A history of market crashes and how they recovered

Market crashes are more common than you may think…
A history of market crashes and how they recovered
Reading time: 7 mins

Dips, drops, bumps and crashes. They happen all the time and one thing market downturns have in common is that they’ve almost always been followed by recoveries. Here’s a short history of market crashes and recoveries.

 

The Tulip Craze (1637)
What happened?
In 1593, tulips were introduced in the Netherlands and became popular. After contracting some virus that started giving their petals a multicolour effect, tulips became widely sought after in the country, and Dutch people would spend a fortune to own the plant – some would even trade their life savings or land to lay their hands on the exotic bulbs. As a result, the price of tulips skyrocketed, forming an economic bubble ready to burst at any time. This is what happened in 1637. The price of tulips was so inflated that it reached a point where no one could really afford it, which triggered a sell off. Then, a domino effect took place and bulbs were worth nothing, meaning people would make a loss when selling their tulips.

How did the markets recover?
Tulip holders sought help from the government, but none of their measures were successful. Eventually, the storm ended up passing without causing any devastating damage to the Dutch economy. But more importantly, people started learning about the dangers of herd mentality in the financial world.

 

The Wall Street Crash (1929)
What happened?
On 29th October 1929, the world stopped for a few minutes as the share prices on the New York Stock Exchange collapsed. Not only was it the end of the ‘roaring twenties’, an era of economic growth and prosperity, but Black Tuesday, as it’s commonly referred to, marked the start of the Great Depression. So, what happened, you ask? Well, during the 1920s, the US stock markets saw rapid expansion, but by summer 1929, the economy started showing signs of a slowdown. Production was declining, unemployment was rising, wages were low, and debt was proliferating. So, the markets started to adjust to the economic reality, and in September, prices began to fall. The sell-off accelerated and on 29th October, the Dow Jones Industrial Average, a US stock market that lists the performance of 30 companies, fell 12%. The decline didn’t stop before 1932, where markets hit their lowest point1.

How did the markets recover?
The crash in 1929 had terrible consequences on the global economy. By 1933, unemployment in the US rose to 25% of the country’s workforce. And that’s not all, if you were lucky enough to be employed, you would have seen your pay fall dramatically2. The Great Depression hit almost everybody in western societies and governments had no choice but to intervene. One notable thing happened in the US, as President Roosevelt launched the New Deal which compiled a number of measures to stimulate the economy and create jobs. The stimulus package managed to restore confidence in the markets and 25 years later, in 1954 to be exact, the Dow Jones Industrial Average managed to recoup its losses3.

 

Black Monday (1987)
What happened?
On Monday 19th October 1987, also known as Black Monday, investors across the globe watched with horror as stock markets collapsed. Markets from all around the world fell more than 20% on that day4. The crash was due to a number of events that created a sense of panic amongst investors. The US economy was slowing down, and US exports were not doing well because of a strong dollar. But what really accelerated the crash was the introduction of computerised trading. The idea of using computer systems to deal with large-scale trades was still very new at the time, and some systems would automatically sell stocks when a specific loss target would be reached, meaning prices were pushed down and a domino effect started, getting markets into a downward spiral.

How did the markets recover?
Black Monday happened very quickly but didn’t last long, and with the help of central banks who cut interest rates, financial markets in the US and Europe fully recovered. In fact, five years later, markets were rising by about 15% a year4.

 

The Dotcom Bubble Burst (early 2000s)
What happened?
Remember the 1990s? The Internet got commercialised and we were all super excited about it – well, we still are! Suddenly, the sky really was the limit and many new Internet-based companies (‘dotcoms’) were launched. Needless to say, investors were loving it and most of them thought that all businesses operating online would become very profitable in the future. Yes, they were wrong! This overconfidence created a speculative bubble – when some investments are overvalued. And in March 2000, the bubble started bursting. The Nasdaq, US market that lists tech companies, fell more than 20% in April, after reaching what, at that time, was its all time high. And by October 2002, the market hit its lowest point – 80% down from its peak in March 20005.

How did the markets recover?
Just like the Tulip Craze, the Dotcom Bubble Burst didn’t last forever, and the Nasdaq eventually recovered after some years. And although the Nasdaq was seriously hit by the Dotcom bubble burst, it bounced back by the end of 2002, and in 2015, the market recouped its losses5.

 

The Global Financial Crisis (2008-2009)
What happened?
In 2008, the world was stunned by the unfolding ‘financial armageddon’. Seemingly indestructible financial institutions failed on both sides of the Atlantic, driving markets to large declines. Take the FTSE 100 for example, in 2008, the UK stock market fell 31%. – not a little fall, that’s for sure6. Then the crash became an economic crisis, and countries around the world went into a long recession. In 2009, the UK GDP (what’s being produced in the country) dropped to -4.2%7, and the unemployment rate rose to 7.9% and reached an all-time high at 8.1% in 20118.

How did the markets recover?
Governments were quick to intervene to try and limit the impact of the crash on the economy and help markets recover. Central banks cut interest rates to stimulate consumption and investment, and greater regulations were introduced in the financial world to guard against further excesses. In the UK, for example, the Bank of England is now responsible for supervising individual banks and building societies and runs aggressive stress tests to evaluate banks’ capacity to deal with severe market conditions without government assistance. With all these measures in place, markets managed to bounce back quickly. For instance, the FTSE 100, which was seriously hit in 2008, recovered 22.1% the following year9.

 

Will financial markets always recover?
Since we can’t predict the future, we can’t really say markets will always bounce back. However, if you look at how markets behaved in the past, you’ll notice that they’ve always recovered at some point. This is what markets do – they have ups and downs, and as an investor, it’s important to learn to live with them. Seeing markets fall can be stressful, but if you react and sell your investments, you could potentially harm your investment journey and miss out on some really good days. If you want to smooth out the bumps whilst taking advantage of the good times, it could be worth sticking with your investments for a number of years. The longer you remain invested, the more likely you are to make a gain. People who invested in the FTSE 100 for any 10-year period between 1986 and 2019 have had an 89% chance of making a positive return – this timeframe includes Black Monday, the Dotcom Bubble, and the Global Financial Crisis of 200810.

 

There are some exceptions…
Market downturns almost always are followed by recoveries, but there are some exceptions worth knowing. A recovery can also depend on your time horizon. The best known example is the Japan bubble. In 1985, Japan signed the Plaza Accord in New York, which agreed a depreciation of the US dollar against the Japanese Yen (and German Deutsche Mark) to boost US exports. In other words, the dollar fell in value relative to other currencies, meaning you could purchase more dollars with the same amount of yens. This agreement had a marvellous impact on Japan’s economy as it made it easier for Japanese companies to buy foreign assets, such as properties and companies. Back then, the Japanese Imperial Palace was famously “worth” as much as all of California11. The opulence was also reflected in the performance of its financial markets. In December 1989, the Nikkei 225, main Japanese market, reached its all-time high at nearly 39,000. But the bubble didn’t last and ended up bursting. By December 1990, the Nikkei 225 had lost more than $2 trillion12. The crash worsened after it impacted the real economy with businesses going bankrupt and consumer spending slowing down. The crisis didn’t really end until 2009 and the introduction of significant economic policy reform helped markets bounce back. However, although the Nikkei 225 has shown strong returns, it has never fully recovered to the level seen in 1989 (yet!).

If anything, the case of the Japan bubble shows that it’s important to spread your money across investment types (e.g. shares and bonds) and regions, that way, you can mitigate the risk of losing everything – this strategy is commonly known as diversification and it can help protect your portfolio from market bumps.

 

References:

1: https://www.investopedia.com/terms/b/blacktuesday.asp

2: https://www.thebalance.com/the-great-depression-of-1929-3306033

3: https://seekingalpha.com/article/200803-recovery-from-1929-crash-was-quicker-than-most-people-think

4: https://www.cityam.com/black-monday-30-years-big-crash-and-fast-did-markets/

5: https://qz.com/348954/the-nasdaq-is-back-to-its-dot-com-bubble-peak/

6: https://www.brewin.co.uk/charities/insight-for-charities/ten-years-after-the-financial-crisis/

7: https://www.statista.com/statistics/281734/gdp-growth-in-the-united-kingdom-uk/

8: https://www.statista.com/statistics/279898/unemployment-rate-in-the-united-kingdom-uk/

9: https://www.forecast-chart.com/historical-ftse-100.html

10: Data from Bloomberg

11: https://amaral.northwestern.edu/blog/how-much-was-japanese-imperial-palace-worth

12: https://www.japantimes.co.jp/news/2009/01/06/reference/lessons-from-when-the-bubble-burst/#.Xt3y_kBFw2x

 

Past performance is not a reliable indicator of future results.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

 

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