The global economy in 2020 was on the verge of collapse due to Covid19 Pandemic hitting absolutely every country in the world. The fears that the stock markets would collapse still have not vanished completely. Due to the ongoing speculations regarding Covid19’s impact on the world economy and specifically stock markets, we decided to illustrate the biggest stock market crashes in history up to date.
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History of biggest stock market crashes summarised in text
What do investors and traders fear the most? The answer is the following three words: stock market crashes. Not only the investments and trades are endangered by the failure of the markets, but they might lead to long-term downfalls, such as the Great Depression or the global financial crisis. There are numerous theories that claim that the outbreak of the current Covid19 pandemic would eventually lead to another collapse of the stock market, however, until now the markets stand solid. Below is the timeline of the most significant stock market crashes in history up until today to understand the signs and damages of markets’ disruptive behavior.
The Panic of 1907
The Panic of 1907 is how people recall the events that began in mid-October 1907 and led to the foundation of Federal Reserves. The starting point of the crisis was the decision of several investors to corner the market on United Copper company stock. Investors, August Heinze and Charles Morse were in charge of 8 national banks and after the failure of their plan, depositors began to withdraw their funds from those banks and hold them in cash. The banks failed in several days.
One of the giant trust companies, Knickerbocker Trust also suspended operations after the news broke out that its founder was an associate of Charles Morse. The failure of Knickerbocker Trust led to the full-scale financial crisis in New York.
J.P. Morgan called the meeting of bank presidents on October 24 informing them that more than 50 stock exchanges were going to suspend unless 25 million US dollars were raised in 10 minutes. 14 bank presidents, together with J. P. Morgan pledged the sum to keep the stock exchange from collapsing and disaster averted.
After two days, the New York Clearing House Committee holds the meeting, where they restrict the convertibility of deposits into cash to aid the market. This Committee meeting is considered to be the birthplace of the Federal Reserve. The Federal Reserve was officially founded on December 23, 1913.
Who made a profit during the Panic of 1907: Neiman-Marcus, an American luxury department store chain was previously set in Atlanta, Georgia. During the crisis of 1907, the company saw an opportunity to open a luxury store in Dallas, Texas. The reason behind the new investment was that Texans were oil-rich and much wealthier at that time than much of the other state populations. Therefore, the panic of 1907 had the least impact on the Dallas community and the store was generating a profit of $40,000 on sales of $700,000.
Wall Street Crash
The mid-to-late 1920s in the US was a period of significant expansion of the stock market, which encouraged people to quickly get involved in trading. Millions of people rushed to brokers to invest their savings and assets in securities. Several billion US dollars were held by brokers in Wall Street when prices began to decline in early October of 1929
The market went into a free fall. The public responded with a natural reaction of rushing to sell their securities. October 24 is known as “Black Thursday” when a record-high 12.9 million shares were traded on that day. However, the next few days appeared to be more dramatic, with the market closing down 12.8 percent on October 28, “Black Monday”. On Black Thursday, October 29, 16 million shares were traded. General Electric drops from 396 to 210 within just a month. American Telephone and Telegraph loses 100 points. DuPont falls from 217 to 80 and Radio Corporation of America drops from 505 to 26.
The market did not recover easily and the overall economy was hurt badly. Tightening of credit by the Federal Reserve, excessive loans from the banks which could not be liquidated, and fear in the public ultimately led to the Great Depression that would last another 10 years.
Joseph Kennedy Sr. was carefully studying the signs of the market crash before 1929. He had several major investments in the market and just weeks before he sensed that it was time to exit the market. He did not simply unload his portfolio, but aggressively shorted it, which made him the single filthy rich person who profited from the Wall Street Crash. Before the crash, his wealth was around 4 million US dollars which is equivalent to almost 60 million USD today, but after the crash and midway through the Great Depression, Joseph Kennedy Sr. was an owner of 180 million US dollars wealth, equivalent to 3.36 billion USD today. That is why many people say that pattern recognition is the heart of Forex.
Black Monday Crash
The biggest single-day crash is known to be the “Black Monday” crash of October 19, 1987. With the introduction of new computer trading programs, the market appeared to be in chaos. Those programs allowed traders to place larger orders in shorter periods of time. Furthermore, the programs were automatically selling the stocks in order to avoid losses, with stop-loss features. This has led to a domino effect, pushing prices of the stocks lower and lower.
Stocks have fallen by 20% in a single day, The Dow and S&P 500 both dropped by more than 21% and NASDAQ lost 11%. The hero of the day was the trader Blair Hull who put a large order for options at the Chicago Board Options that saved some of the hardship. However, consumer confidence was significantly hurt.
The Securities and Exchange Commission introduced circuit breakers that would suspend trading for the day as soon as the exchanges fell below a certain limit. The Federal Reserve Chairman, Alan Greenspan also announced that the credit would be easily available and that the Fed would ensure to avoid unnecessary panic for the upcoming days.
Paul Tudor Jones, who is one of the most successful traders in history, spent days studying the graphs of the 1929’s stock market crash. He and his colleagues noticed certain similarities to the trends of the market in 1987 and planned for the biggest trade of history. Just two weeks before the Black Monday Crash, Tudor Investment Group began overtrading against the market and by the end of the trading day on October 19th, Tudor Jones walked away with over $100 million dollars of profit.
Asian Financial Crisis
Asian Financial Crisis was a major crash of the century on the continent that occurred in 1997-98. The misfortune began when the Thailand government decided to no longer peg the Thai Baht to the US dollar. The devaluation of the Thai Baht led to a large portion of Asian currencies to drastically fall, as well, some even by more than 40%.
The devaluation of currencies quickly spread to the major currencies of Asia, with the South Korean won decreasing by 34.1%, the Philippine peso falling by 37.4%, and the Indonesian Rupiah dropping by 83.2%. The currency crisis of Asian countries quickly expressed on the international market with international stocks declining by as much as 60% in that period.
All of the affected countries applied for the loan and bailout packages of the International Monetary Fund and the World Bank. Billions of US dollar packages were granted to the states, which furthermore triggered the local communities in South Korea and Indonesia. A number of protests were held against the government as the public considered the request for help to be a great humiliation to their nations.
Luckily, the financial intervention from IMF and the World Bank slowed down the devastating effect of the Asian Crisis and the situation was stemmed due to the international aid provided by them.
Some people blame George Soros for initiating the Asian crisis through his massive bet against the Thai Baht in 1997. Soros placed $1 billion, which was 1/12 of his total fortune at that time against the currency and it was not long before the problems emerged on the Asian currency market. The central bank of Thailand has run out of money soon causing the price of Thai Baht to decrease by 40.2%, which would earn Soros more than 40 million USD of profit.
Dot-com Bubble Burst
The 21st century began with the dot-com bubble burst of 2000. With the internet revolution, the stocks in companies with dot com in their names quickly surged. These companies were spending fortunes on the advertising campaigns and they quickly became overvalued in the market. More than twelve dot-com stocks rose by more than 1000% in price.
However, soon, the Federal Reserve imposed very strict money policies that resulted in limited spending by the mentioned companies and the traders began to gradually sell the stocks. Pets.com, toys.com, and WebVan.com all completely vanished from the market along with multiple dot-com companies, including even larger, blue-chip tech companies.
Consequently, the NASDAQ which was by that time full of the tech company stocks experienced a major fall of more than 75% in October 2002.
Dot-com Bubble Burst caused the $1.7 loss in the internet stock market. Surprisingly, there were no trading giants or famous names who profited from the bubble burst, as apparently, it was unexpected for most of the investors. However, according to some sources insiders at dot-com companies have cashed out the profit of $43 billion before the crash happened. The profits generated from the crash were even greater, some 260 billion US dollars were earned by the individual, average investors.
Global Financial Crisis
One of the most well-known crashes of history is the Global Financial Crisis of 2008, which is frequently mentioned as the Subprime Mortgage Crisis. From the beginning of the 21st century, the real estate business has been booming. The lenders were granting loans to under-qualified home buyers without hesitation. Most of the investors were holding mortgage-backed securities in their portfolios.
However, the situation quickly turned sides. The bad loans that were issued by lenders and banks, peoples’ reluctance to cover the bad debts, and rapidly decreasing prices on mortgage-backed securities resulted in a dramatic downturn of the economy. By September, the market was already down by 20%, Dow Jones Industrial Average dropped 500 points and financial giants, such as Bear Stearns and Lehman Brothers failed as the majority of their investments were held in real estate securities.
The unemployment rate exceeded 10%. Inflation was heating up the whole world. The crisis of the United States spread overseas, as well as reaching Japan. Nikkei lost 10% of its price in October with some of the major markets of Europe and Asia also experiencing tremendous losses. The US entered a great recession that lasted over one year, but the economy took a long to recover fully.
The juiciest win of the 2008 global financial crisis was claimed by John Paulson, The hedge fund under his ownership, Paulson & Co. generated profits of over 20 billion US dollars, as the company was aggressively betting against subprime mortgages. The personal earnings of Paulson are estimated to be over 4 billion US dollars from the deal.
Last but not least the current COVID-19 pandemic has been the topic of heated debate for the past year. Even though the stock market seems to be doing just fine by now, there were serious downfalls earlier in 2020. By the beginning of 2020, COVID-19 had spread widely in China and then to Europe and to the US, where restaurants and nonessential stores closed to stem the tide of infection. In March, the lockdowns were announced almost in every country worldwide.
In Spring, 2020, most of the restaurants were closed and switched to delivery-only modes, travel restrictions were imposed with major airlines shutting down completely and some stores and shopping malls closed down, as well. Dow Jones Industrial Average lost over 13% and S&P 500 dropped by 12%. By the end of 2020, more than 31 million people were left unemployed in the United States.
However, currently, the stock market has no significant issues or threats and with the vaccines becoming available globally, it is expected that the economy will begin to gradually recover as people keep trading during Covid-19 pandemic.