The Five Biggest Market Crashes in U.S. History — and How to Prepare for the Next One

The U.S. stock market had its worst start since 1939 this year – and some experts fear that’s just the beginning. With rumblings of an impending recession, inflation at its highest in over 40 years, and volatile trading days, many investors are worried we’ll see another crash in the coming weeks or days.

What would a stock market crash look like, and how long would it take to recover? The stock market has had five large crashes in its history, and each time it has bounced back. The biggest variable is how long it took to recover.

“You never know what the next big crash is, whether it’s COVID-19, or the Great Recession, or what we’re going through today,” says Melissa Bouchillon, a CFP and managing partner at Sound View Wealth Advisors in Savannah, Georgia. “You have to always have a component of your portfolio prepared for when things get bad.”

So what can investors do to prepare? We’ll look back at five of the biggest stock market crashes in U.S. history, and how to get in financial shape in case one is on its way.

What’s a Stock Market Crash?

A market crash is a sharp, sudden drop in stock prices which can be caused by a variety of factors. There’s no set benchmark for what constitutes a crash.

The Five Biggest Market Crashes In U.S. History

2020: The COVID-19 Crash

  • Market loss: 34%
  • Time to recover: 33 days

The latest crash still on many investors’ minds is the one caused by the COVID-19 pandemic. Because of the virus, global governments shut down entire economies to slow the spread, causing an economic shock that rattled investors.

Unlike the other crashes on this list, this one hit surprisingly fast and recovered just as quickly. The stock market fell 34% but regained its peak in only 33 days, a historically fast turnaround. With previous crashes, the journey to the bottom – and subsequent recovery – was slower.

The U.S. government reacted in part by injecting trillions of dollars into the U.S. economy. Between printing money and stimulus payments, it was the most cash added to circulation since 1945.

Despite the terrible human costs of the pandemic and the financial suffering felt by millions, what followed was an amazing upward run in the market. Companies reported record profits, valuations soared, and, for a while, the market reacted as though the crash had never happened.

2008: The Subprime Mortgage Crisis

  • S&P 500 loss: 57%
  • Time to recover: 17 months

The cause of this crash was banks’ loose lending practices for mortgages (particularly subprime mortgages), which had a ripple effect through the entire economy – resulting in the worst crash since the Great Depression. “It was a very specific trigger. There were really terrible loans in the housing market,” explains Linda García, founder of In Luz We Trust, a financial coaching business.

As residential home foreclosures picked up, so did the national unemployment rate. The S&P 500 fell nearly 57% from its peak—and took global markets down with it. “Valuations [of homes] were actually not good and prices were through the roof,” adds Kimberly R. Nelson, advisor at Coastal Bridge Advisors.

Recovery came from government bailouts, fresh injections of cash into the economy, and interest rates slashed to historically low levels.

It took around 17 months for the market to recover. When it did, one of the longest and most profitable bull runs in history began in 2009 and lasted all the way to 2020 – the start of the COVID-19 pandemic. During bull markets, market confidence is high and investors are eager to buy stocks. The opposite is true in bear markets.

2000: The Dotcom Bubble

  • Nasdaq loss: 77%
  • Time to recover: 15 years

When the 21st century rolled around, the stock market was reeling from the aftermath of the “dotcom bubble,” caused by major overvaluation of tech companies in the late 1990s. A bubble is caused by valuations that don’t match a company’s financial stability, and is often spurred by eager investors trying to chase the next big thing – even if a company doesn’t have revenue. This was the case with many of these tech companies.

This was the first big crash for tech stocks that make up the Nasdaq Composite Index. Between 1995 and 2000, the Nasdaq rose more than 500%. By 2002, the index fell nearly 77% and wouldn’t reach its former peak again for almost 15 years.

1973: The Oil Crisis and Economic Recession

  • Market loss: 48%
  • Time to recover: 21 months

At the time, this crash was the worst since the Great Depression. There wasn’t one event that caused the crash, but a series of events.

First, there were several financial reforms, including depegging or unlinking the dollar from gold, which undermined the dollar’s stability and contributed to runaway inflation. In parallel, there was an economic recession, then the 1973 oil crisis, in which the price of oil nearly quadrupled and sped up inflation that much faster.

All combined, these events created a crash that saw the market decline by 48% – taking about 21 months to recover.

1929: The Worst Crash in History

  • Dow loss: 89%
  • Time to recover: 25 years

The stock market crash of 1929 put an end to the Roaring 20s and started the Great Depression. The stock market contracted so much that it would take until 1954 to fully regain its pre-crash value.

Stocks began dipping in September of that year, but two consecutive days in late October – the 28th and 29th – saw a nearly 13% decrease and another nearly 12% dip, respectively. These days are now known as Black Monday and Black Tuesday, still the biggest two-day loss in history. It was enough to rattle investors into panic selling.

A couple of weeks later, the Dow lost half of its value (the S&P 500 and Nasdaq were not used as markers at that time) and entered into a long bear market. In 1932, the market found its ultimate bottom at a staggering 89% below peak.

This period of history was tumultuous, with the Great Depression, Dust Bowl, World War II, and other distressing international events. Hundreds of companies filed for bankruptcy.

What Investors Can Do to Prepare

Crashes and downturns are part of investing—and the only way to lose money during a market dip is if you sell your investments. If history is any indication, your investments will make up their losses in time.

Still, in moments of volatility and uncertainty, there are things you can do to shore up your finances.

Pay off high interest debt

Any debt higher than 8% is known as toxic debt. That’s because the stock market traditionally returns an annual rate of 8-10%, so any debt higher than that is debt that loses you money. Credit cards and high-interest personal loans often fall into this category. To manage toxic debt, make a budget and a payoff plan. This will help you take control of your money and build your credit. It will also put you in a good position to start an emergency fund, if you haven’t already.

Have a fully funded emergency fund

Experts agree that everyone should have an emergency fund, or a liquid cash safety net, in case something happens like losing your job or another financial burden. Usually 3-6 months of expenses is preferred, although some experts argue that upwards of 9 months to a year of expenses is best. The best place to keep an emergency fund is in a high-yield savings account.

Don’t spend excessive amounts of money

Times of economic uncertainty may not be the moment to buy that new TV or car. In case of a recession, it’s best to keep your money where you can see it: in a fully funded emergency fund and if you can, invested.

Make sure your investments are diversified

Once you make sure your ducks are in a row—aka your high interest debt is paid off and your emergency fund is fully funded—investing is a great next step. Many investors find opportunities like this to invest, as stocks are “on sale.”

Investing is for everyone, regardless of age. And the sooner you start investing, the better.

Diversifying your investments and spreading out your money among hundreds or thousands of different companies is what experts agree you should do to build a robust investment portfolio. Once you pick a brokerage you like, like Fidelity or Charles Schwab, find a target date fund for your investments. Target date funds take the guesswork out of investing and adjust your risk tolerance based on your age. Index funds are great options too. These funds track the overall market or a particular type of stock. Keep dollar-cost averaging, or putting the same amount of money into your accounts every month, to keep a steady stream of money going to your investment accounts.

“For folks with a long time horizon that are investing and dollar-cost averaging in their retirement plans every month, it’s actually good to be buying right now,” says Bouchillon.

The best way to cope when the market starts to go down is to stick to your plan, remember why you’re investing, and follow your regular investment schedule.

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