The 1929 crash and the Great Depression

The Dow Jones Industrial Average closed at a record 381.17 on September 3, 1929, after a boom fueled partly by borrowed money: many investors bought on margin, putting down as little as about 10% of the price. The selling peaked in late October. On October 28 the Dow fell nearly 13%, and on October 29, Black Tuesday, nearly 12% more, as margin calls forced holders to sell into the fall.

That was only the start. With rallies along the way, the Dow slid until July 8, 1932, when it closed at 41.22, about 89% below its peak. The crash deepened a recession that had begun in mid-1929, and waves of bank failures turned it into the Great Depression. The response reshaped markets: the Securities Act of 1933 and the Securities Exchange Act of 1934 brought disclosure rules, created the SEC and gave the Federal Reserve power to set margin requirements, the basis of today’s margin trading rules.

Black Monday, October 19, 1987

On Monday, October 19, 1987, the Dow fell 508 points, or 22.6%, its largest one-day percentage drop on record; the S&P 500 lost about 20.5%. There was no single piece of news. Prices were stretched after a long rally, and portfolio insurance, a hedging method that sold index futures as prices fell, turned early losses into more selling.

The next day the Federal Reserve said it stood ready to serve as a source of liquidity, and no recession followed. The Dow closed above its August 1987 high in August 1989, less than two years later. The lasting change was the circuit breaker: exchanges introduced market-wide halts in 1988, and today’s version pauses all US stocks when the S&P 500 falls 7% or 13% and closes the market at 20%. See trading halts and circuit breakers.

The dot-com bust and the 2008 financial crisis

These two unfolded over years. In the late 1990s investors bid up internet and technology stocks on the promise of growth, many with little or no profit. The Nasdaq Composite closed at a record 5,048.62 on March 10, 2000, then fell for two and a half years to 1,114.11 on October 9, 2002, about 78% lower. Many young internet companies went out of business, and accounting scandals at Enron and WorldCom in the same bear market led to the Sarbanes-Oxley Act of 2002.

The 2008 crisis started in housing. Risky mortgages had been packaged into securities held across a heavily leveraged financial system; as home prices fell, the losses spread, and Lehman Brothers filed for bankruptcy in September 2008. The S&P 500 fell about 57% from its closing high on October 9, 2007 to its low on March 9, 2009. The reforms included the Dodd-Frank Act of 2010 and tougher capital rules for banks.

The Covid crash of 2020

As the pandemic spread, the S&P 500 fell nearly 34% from its record close on February 19, 2020 to its low on March 23, in about a month, one of the fastest declines on record. Market-wide circuit breakers halted trading four times in March, and the VIX closed at a record 82.69 on March 16.

The recovery was just as unusual. The Federal Reserve cut rates to near zero and bought bonds on a huge scale, Congress passed large relief packages, and the S&P 500 closed at a new record on August 18, 2020, six months after the old one. The drawing below compares that narrow dip with the wide, slow bowl of 2007–2013. A fast rebound in 2020 says nothing about the speed of the next one.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn underwater chart of the S&P 500’s fall below its old high by month after the peak, from 0% down to −60%. A wide grey bowl for 2007–09 sinks to −57% at month 17 and climbs back to 0% around month 65, labeled 2007–09: −57% over 17 months, about 5½ years below the old high. A narrow red spike at the start drops to −34% and is back by month 6, labeled 2020: −34% in about a month, back at the high in about 6 months. A footnote reads S&P 500 closes; shapes simplified.

How long did stocks take to recover after a crash?

It varied enormously. Counting from the old peak to the first close above it, on price alone, as in the drawing below:

  • Dow after 1929: about 25 years, to November 1954. Investors who held and collected dividends, in a period when prices also fell, got back sooner, but still after years.
  • Dow after 1987: about two years, to August 1989.
  • Nasdaq after 2000: about 15 years, to April 2015.
  • S&P 500 after 2007: about 5½ years, to March 2013.
  • S&P 500 after February 2020: six months, to August 2020.

Turn your phone sideways to read the drawing. Tap to close.

Hand-drawn horizontal bars on one scale for the time from the old high to the first close above it: 1929 Dow, about 25 years; 1987 Dow, about 2 years; 2000 Nasdaq, about 15 years; 2007 S&P 500, about 5½ years; 2020 S&P 500, 6 months (a short green bar). A footnote reads price only, before dividends and inflation.

What did we learn from stock market crashes?

Each crash had its own trigger, and none was announced in advance. The same lessons keep coming back:

  • Diversify: a portfolio built on one theme, like internet stocks in 2000, fell far more than the broad market, and some single stocks never recovered. See portfolio diversification and index fund investing.
  • Leverage kills: margin in 1929 and leveraged finance in 2008 turned falling prices into forced selling. Borrowed money can make you sell at the bottom whatever your plan.
  • Panic selling locks in losses: selling near the March 2020 low meant missing a rebound to a new record within five months. Decide in calm times what you will do in a fall; trading psychology explains why that is hard in the moment.
  • Size for survival: a risk management plan that keeps losses survivable, plus cash for near-term needs, means a crash does not force you out.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn checklist card titled what the crashes taught, with five green-ticked boxes: spread risk: no single stock, sector or theme; limit leverage: margin calls sell at the bottom; write the plan before the panic, not during it; size so a 50% fall is painful, not fatal; recoveries took months in some cases, decades in others.