When it comes to the USA stock markets, bubbles are everywhere. You have a Financial Asset Bubble. You have the Stock Bubble. You have a Dot com Bubble? Which one is going to burst first in 2014? Is this going to lead to a stock market bear market? Will it lead to a stock market crash?
Bubbles have been around prior to some of our biggest stock market crashes. Most have developed because an industry, or the government, has established some program that gives value for very little in return. It is a classic tale of supply and demand. A great example is the subprime mortgage bubble that existed in the mid-2000s.
People wanted houses with no or little money down. Banks and lenders were accommodating, giving people their dream houses, two or three times more expensive than was affordable by the buyer. All this worked like a charm until homeowners started missing their high mortgage payments, which proofed to be the pin that popped the housing bubble. Our economy tanked soon after into the Great Recession.
Depending on what you are reading, we will face different challenges in 2014. Some say we face a devaluation of the stock market because it is time for the market to correct itself. Some say the dot com craze has reached its saturation point so will implode at any time. Everyone seems to agree that something will give away very soon.
To help us prepare for the happy day, we have compiled a list of the biggest stock market crashes. These events have shaped us as a country. We have had many downturns in our stock markets, but only the ones that had a wider impact made our list. I am sure you can guess the top one, but read on to help prepare you for the impending doom of another bubble popping.
10. 2010 Flash Crash
In 2010, 20 minutes of living hell captured the stock market as the stock market saw the Dow Jones Industrial Average lose 1000 points, only to have it recover the points minutes later. It seemed at the time that it was a one and done event, but the repercussions are still with us today. Believe or not, we experienced several more flash crashes since the first one in 2010. Market volatility eroded the trust in the markets for some who were hesitant to trust their money to computers. The most frightening aspect of the event in 2010 was that no one could identify the main cause of the event, although some safety precautions have been installed(and seem to be working).
9. Panic of 1857
Speculation into an industry was prevalent in the 19th century(like it is today!). In 1857, it was railroads. The Ohio Life and Insurance Company made some risky investments with railroads, causing it to fail, which lead to a panic on Wall Street. As stocks lost their value, investors rushed to get their money, making the streets impassable. Nine hundred mercantile banks closed by the end of the year leading to the US economy crashing. Many people lost their fortunes including future President Ulysses S. Grant. It took until 1859 for the economy to recover.
8. Black Monday
Can you imagine the fear people felt on Monday, October 19, 1987 when the stock market fell 22.6% or 508 points? It was the single largest one day market decline in history. The days before it was not much better as the market fell 8 percent. In the span of five days, the market lost 30 percent of its value. Many fingers were pointed for the rapid fall including some badly timed comments from the federal government on a large trade deficit. Other possible causes included computer issues and even people’s interest in investing in bonds versus stocks. It took until September 1987 for the market to recover back to its former levels. Surprisingly, the impact on the economy was somewhat limited, no recession or depression, mostly due to the intervention of the Federal Reserve. However, politicians learned their lesson on speaking too brashly about economic policy and have (for the most part) shown restraint since that time. .
7. Black Friday
Do you think one or two individuals have ever caused the whole stock market to come crumbling down? Black Friday of 1869 was a proof positive that it has happened. In the mid-1860s, the United States government needed money to rebuild the country after the Civil War so they bought a large amount of public debt. Most people believed the “greenbacks” would be bought back with gold. Two individuals, James Fisk and Jay Gould, decided to corner the gold market in order to make their millions. When they followed through on their idea, the price of gold sky rocketed (to highs not seen again until the 1960s) and stocks crashed. When President Ulysses S. Grant (there’s his name again!) found out what they did, he released enough gold into the economy to stabilize things, but the damaged had been done. Thousands lost everything.
6.Panic of 1907
What did the Great San Francisco Earthquake in 1906 have to do with the Panic of 1907? It was the first in a series of events that lead to a 24% decrease in the stock market by September of that year. San Francisco was disseminated by the natural disaster so the Federal government stepped up payments to assist with the reconstruction. This aid, coupled with raising interest rates from England to cover insurance claims, led to a steady decline in stock prices. Two hasty governments , followed by a copper market collapse and the failure of a New York City Bond offering, nailed the coffin shut for the stock market in 1907. The greatest legacies from this panic were the passing of the Aldrich-Vreeland Act in 1908 and the Federal Reserve Act in 1913.
5. Panic of 1819
The first recorded depression in our history was rooted in the War of 1812. It was based on problems in cotton prices and a contraction in available credit. Banks were forced to call in loans and farm foreclosures were common throughout the country, but most of the trouble was in the south and the west. Andrew Jackson was elected President because of the panic of 1819. This one made our list because of its historical implications. After all was said and done, the people of America more fully appreciated the role government needed to play in our daily lives.
4. 1990-1991 Recession
If you were lucky enough to live in the late 1980s, you remember how difficult it became after the boom of the Reagan years. First, the Savings and Loan Bubble burst into a million pieces. One collapse led to another as the Housing Bubble blew up following the S&L crisis. In 1990, we invaded Iraq and the oil prices went into the stratosphere. High interest rates did not help matters much. This recession was our first indication of how important the stock market had become to the health of our economy.
3. Dot Com Bubble
The Internet hit the commercial landscape in 1995. By 2000, it was apparent that the public was wild about it. Venture investors were crazy for the new business ideas the Internet was bringing to Silicon Valley. Money was thrown at the dot com businesses with no idea on how profit would be realized. Millionaires were made overnight. In May 2000, the bubble fell back to earth and millions of dollars were lost. The NASDAQ lost 78%, falling from 5046 to 1114, which took over fifteen years to recover the numbers seen during the dot com era.
2. United States Bear Market 2007-2009
The housing market collapse in 2007 was the main impetus for this crisis. On September 28, the Dow Jones lost 777 points in one day. Scholars did not agree on the one specific cause of the crash. Some people blamed the economy while others pointed fingers at the two presidents: Bush and Obama. Despite the reasons, this bear market was called the Great Recession and saw thousands lose their jobs and houses. The government bailed out banks, “Too big to fail” and passed even more regulations in the hope to keep it from happening again.
1. Wall Street Crash of 1929
The Wall Street Crash of 1929 ranked number one on our list because all the stock market crashes before and after were compared to it. This crash became the litmus test for all depressions and recessions. The Great Depression resulted from the crash. Millions of people lost everything. How many times during the Great Recession did you hear, “worst since the Great Depression.” No stock market crash affected the country like the one in 1929. Many of the federal social programs in place today were passed during the Great Depression years. It changed the country forever.