A brief history of stock market crashes and corrections

By Scott A. Grant

Stock market corrections are painful. They tear our psyche and damage our emotions. They often cause widespread panic. Fear is one of the strongest human emotions. For all our outward bravado, we scare quite easily. When the stock market starts falling, it can make us panic. What if I lose all my money? How will I feed my children? Panic can cause us to make poor emotional decisions. And let’s be honest, when we make bad decisions, those decisions usually come from our emotions, not our logic.

As I’m sure everyone knows, we recently experienced one of those painful declines. It might be useful to look at past stock market declines and see what they can tell us about today and tomorrow. The ancestor of all stock market declines was the crash of 1929. In September, the Dow Jones Industrial Average peaked at 381. From October, the market began a devastating four-year decline that brought the Dow back to 41. This decline created the Great Depression. People were starving.

In 1962, the market suffered a sharp decline known as the Kennedy Slide or Flash Crash of 1962. From a high near 750 in 1961, the market fell to a low of under 550. At the time , in a rare candid moment, the president of the American Stock Exchange attributed the sharp decline to the market correcting from an overbought position.

The next major event occurs between 1970 and 1982. This was a period of high inflation and it is certainly one that scares many investors today. Inflation is insidious and, like black mold, it is difficult to kill. Over the 12-year period, as four different presidents tried to whip inflation now, the Dow rebounded from a low of just over 600 to a high of just over 1,000 at four occasions. Every time the Dow hit 1,000, it immediately fell back down. This was until the fourth time under the Regan administration. The fourth assault on the Dow 1000 turned out to be the charm. The Dow has climbed to 2,750 in five years.

1987 was painful. The Dow Jones fell 22.6% in a single day in October. I remember sitting in my office at EF Hutton & Co. It felt like the world was coming to an end. In total, the market would yield 1,000 Dow points from 2,750 to 1,750. It then recovered. In July 1990, the Dow set a new record at 2999.75. It took three years, which is a lifetime for an individual and a drop in the ocean for our country. In total for the decade, the Dow went from a low of around 800 to a high of around 3000, which is pretty good, especially considering the 30% decline in 1987.

The worst stock market event of this century occurred when the Dot Com bubble burst in January 2000. The market began a debilitating decline that lasted three long years. This three-year decline took the Dow Jones from a high of 11,700 to a low of 7,500. The steady, never-ending decline over this three-year period was hard to stomach. The market would not reach a new high until 2006.

Many people remember the Great Recession of 2008-2009 as the worst financial calamity this country has ever seen. This was not the case. However, the market decline was exceptionally steep. After peaking at just over 14,000, the Dow fell to 6,600 on March 10, 2009. A year later, the Dow had recovered most of its losses, and within two years almost all of them.

Recently, the market experienced another significant decline. After ending last year at around 37,000, the Dow fell to a low of 28,600 before rebounding to just over 32,500 on October 28, the 93rd anniversary of the 1929 crash.

All of these events followed periods of irrational exuberance, often driven by young investors and built around the myth that the market always goes up. This is not the case. The market goes up and the market goes down. It’s like life. During times of investment turmoil, scammers come out of the woodwork like cockroaches offering secret, high-commission magic that promises to ease all your emotional and financial anxieties. Don’t be fooled. Magic does not exist. Cults often promise the same thing, secret knowledge that will ease all your emotional and financial anxieties. Joining a cult is almost never a good idea.

Looking at the past, we can see that when the market has gone down in the past, it has always recovered and gone up. It will probably be the case again, although there are no guarantees. If you’re still nervous and scared, my best advice is to give me a call. I will give you honest advice and help you as much as you allow me.

Scott A. Grant is a local author and historian. By day, he is a fiduciary asset manager at Standfast Asset Management. He doesn’t believe in magic. [email protected]

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