The 8 Worst Market Crashes of the Last Century

If you’re in a frenzy because of the market’s recent volatility, a bit of perspective might come in handy. After all, studies show that a steady hand is a key to building long-term financial security. No one can know what the future might have in store for stocks, but lessons learned from prior stock market crashes could help you navigate the next one. Read on to learn what caused the eight worst market sell-offs over the past 100 years and what happened afterward.

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What happened: Although the typical bear market lasts 1.4 years, stocks lost 21.4% of their value in just six months in 1946.

Why it happened: Most market crashes are preceded by periods of growth and inflation and 1946 wasn’t an exception. Pent-up demand after World War II caused a spike in inflation and speculation and as a result, regulators increased stock market margin requirements in January 1946 to 100% from 75%. In order to meet those new requirements, many investors were forced to sell their shares and that contributed to the market going into a short-term tailspin.

What happened next: Stocks bounced around through 1949, but then they went on to big gains in the 1950s. In the 15.1-year span following 1946's bear market, stocks returned an eye-popping 16.8% annually.

What happened: There were a couple stock market drops of more than 10% in the 1950s, but it wasn’t until 1962's 21.7% drop that investors suffered another bear market decline of greater than 20%. 

Why it happened: Valuation and uncertainty often contribute to bear market drops and in 1962, price to earnings ratios were at their highest since 1946 and uncertainty was soaring. The country was on a collision course with Russia over Cuba and Vietnam, and President Kennedy was criticizing steelmakers for unilateral price increases, which was worrying business leaders.

What happened next: Patient investors were rewarded with a 6.4-year rally that delivered them annualized returns of 14.9% per year.

What happened: The snap-back multi-year run in the mid-60s came to an end in the late 60s when stocks fell 29.3% over a 1.6-year period beginning in late 1968.

Why it happened: Inflation was accelerating at a 6% clip and the country was reeling from the assassination of Robert Kennedy and Martin Luther King, Jr. earlier in the year. Riots and unrest associated with the civil rights movement and the U.S.'s growing role in Vietnam did little to inspire investor confidence, either.

What happened next: The steep sell-off in the late 1960s was followed by a 2.5-year, 75.6% snap-back rally, making this one of the most volatile periods for stocks in the 20^th century.

What happened: Over 39-trading days in 1987, the S&P 500 lost nearly 30% of its value. On Monday, Oct. 19, 1987, the Dow Jones Industrial Average lost an astounding 23% alone, which remains the biggest one-day drubbing in history.

Why it happened: Black Monday’s crash came on the same day that U.S. warships shelled an Iranian oil platform in retaliation for missile strikes by Iran on two oil freighters with ties to the United States. The uncertainty in the Middle East was compounded by rising concern over the U.S. economy and stock valuations. Inflation was rearing its ugly head and a strong dollar was crimping U.S. exports. Meanwhile, price to earnings ratios had increased to 20, a historically rich valuation. The exact cause of Black Monday's crash is debatable, but the sell-off was likely worsened by the emerging use of computer-based trading systems that lacked the circuit breakers we have today.

What happened next: The rapid crash caught investors by surprise, but those who held onto their stocks were rewarded with an 845.2% return over the next 12.9 years.

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What happened: The rally exiting the late 1960s bear market grinded to a halt in 1973 when a nearly two-year crash erased almost 43% of the S&P 500’s value.

Why it happened: From 1972 to 1974, U.S. real GDP growth fell from 7.2% to negative 2.1% and inflation sky-rocketed from 3.4% to 12.3%. A big reason for the deteriorating economy was OPEC’s oil embargo in 1973, which caused oil prices to quadruple. Uncertainty from the Watergate scandal didn’t help matters, either. After burglars tied to Nixon’s re-election campaign were arrested in June 1972 for breaking into the Democratic National Committee’s headquarters, evidence that Nixon was attempting to cover-up his campaign’s connection was mounting. With his impeachment looming, Nixon resigned in August 1974, only a few months before the bear market ended.

What happened next: This steep decline preceded a massive 845% rally in the S&P 500 that lasted nearly 13 years.

What happened: The S&P 500’s rally in the 1990s came to an end when the calendar flipped to 2000. Over the next two years, the market declined by a whopping 44.7%.

Why it happened:  A technology-inspired economic expansion coincided with the balancing of the U.S. budget, a cut in capital gains tax rates in 1997, and the creation of the investment-friendly Roth IRA. Those factors fueled speculation and pushed valuations to stratospheric levels, especially in technology. For example, the tech-heavy Nasdaq Index soared to 5,000 from 1,000 between 1995 and 2000.  The combination of internet stocks going bankrupt, Enron’s surprising accounting scandal, and the 9/11 terrorist attacks all weighed down interest in stocks.

What happened next: Despite significant losses caused by the internet bubble bursting and uncertainty tied to terrorism, the S&P 500 found its footing in 2002 and then it more than doubled over the next five years.

What happened: The rally following the internet boom-bust period was derailed in 2007 when the stock market lost more than 50% of its value over 1.3-years.

Why it happened:  Banks financed a housing boom in the 2000s by packaging loans into bond products called mortgage-backed securities (MBS). Because bundling these loans together allowed banks to sell their mortgage risk to others, demand for MBS led to deteriorating loan standards and eventually, an increase in defaults. As defaults increased and investors began questioning the validity of top-notch credit ratings assigned to these packaged loans, it became impossible to sell them at any price. This caused significant write-downs and in some cases, insolvency. Some companies were taken over by the government. Others were merged out of existence or went bankrupt. The resulting credit crunch caused by this financial disaster caused a global decline in asset values and demand for goods and services that took a hefty toll on economies worldwide.

What happened next: As damaging as the Great Recession was, the S&P 500 has since more than recouped its losses, increasing 385% through 2017.

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What happened: The Great Depression is the grand-daddy of this past century’s bear markets. Only months after newly-elected President Hoover declared that the roaring-20's economic successes would end poverty, the stock market lost 83.4% of its value between 1929 and June 1932.

Why it happened:  Companies recorded record profits in the 1920s after World War I ended. Credit was easy to come by (total debt to GDP soared to 300%) and speculation was du jour (margin requirements were just 10%). The combination of easy credit and rampant speculation propelled the Dow Jones Industrial Average from about 100 in 1923 to about 300 at the end of 1928. The rapid run-up in stocks led many investors to borrow heavily to buy stocks and unfortunately, that made them unable to meet their margin calls when stocks tumbled 12% on Tuesday, Oct. 29, 1929. Ultimately, the snowballing effect from defaults disrupted economic growth, bankrupted lenders, and sent the global economy reeling.

What happened next: The Great Depression was a time of significant despair, but today, it serves as an important reminder that, over time, investors have benefited tremendously from riding out the worst market crashes. In the 14-years following the Great Depression’s bear market, stocks increased by 815% and today, the Dow Jones Industrials is trading at nearly 25,000, which is miles higher than its 1929 levels.

Todd Campbell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.