A history of panics in the stock market and how long it took to recover.

By: Julio Cacho, PhD & Juan Carlos Herrera

The US has encountered many stock market crashes over the past 100 years. We take a look back at some of the worst to remind investors of the importance diversification across asset classes makes. We briefly summarize the causes, the magnitude of the drops, and the time it took for investors to get back to break even.

Percentage drop in the S&P 500


The stock market crash of 1929 is known for being the culprit of the Great Depression. After World War I, the roaring 20’s ushered in a new era of economic expansion and relaxed margin requirements, which fueled a speculative bubble in the stock market that came to a crashing end in October 1929. The S&P 500 managed to fall 86% in less than 3 years; however, it only took passive investors 4 ½ years to recover. 


Following World War II, industrial demand fell off a cliff and Americans poured their cash into savings, tipping the economy into a sharp “inventory recession”. This caused the S&P 500 to fall more than 29.6%. It took 4 years to break even again.


Following the Bay of Pigs attack in April 1961, fear of nuclear war with the Soviet Union spooked investors, which led to a fall of 28% in the S&P 500. It took 2 years to recover. 


After many years of economic growth, Richard Nixon won re-election. The central bank, under political pressure to keep interest rates low, caused inflation to soar, averaging around 6% per year. This caused the S&P to fall 36.1% and it took 3 years for the market to break even. 


The 1970’s oil embargo coupled with Israel’s Yom Kippur War sent energy prices surging, causing the annual consumer inflation rate to top 10%. This led to a 48% drop in the S&P 500 and it took 7 years to recover. 


After the high inflation of the 1970’s, the Federal Reserve began taking drastic measures to finally put a lid on inflation. They raised interest rates to nearly 20%, which pushed the economy into a recession and caused the S&P 500 to pull back 27.8%. It took 2 years to get back to the highs. 


The famous Black Monday stock market crash occurred on October 19th after a long bull market that was dominated by the corporate raiders, leveraged buyouts, heated currency debates, and the use of derivatives sold as portfolio insurance. The S&P 500 crashed 22.6% in one day and 33.5% in the period. The crash was quick and steep, and it took the market just 2 years  to get back to its 1987 highs. 


After the internet “changed the world” in the mid-1990’s, Wall Street poured money into any company that had an online presence.  This led to one of the most speculative stock bubbles ever. Companies with no revenues, and in some cases no business plans, raised millions in hopes that the internet would change the economy forever. The party finally came to an end in March of 2000 as Nasdaq began its over 50% tumble. It took investors more than 12 years to see the 2000 highs again. The more-diversified S&P 500 lost 49.1% of its value but took only half the time, 6 years, to get back to its all-time high. 


The most recent stock market crash happened during one of the worst economic downturns since the great depression. Record low-interest rates in the early 2000’s, to help combat the bursting of the dot-com bubble, fueled new speculations in home prices, causing one of the most contagious recessions ever. This crisis brought down mega-banks such as Lehman Brothers and Bear Sterns, and caused the S&P 500 to drop 56.4% in value. It took unprecedented central bank stimulus to recover and by 2012, 5 years later, the S&P finally got back to its highs set in 2007.


This list isn't intended to keep people from investing in the S&P 500. It is data that shows that even though indexing is a great financial decision, being diversified is EXTREMELY important because not every market will fluctuate simultaneously. Don't wait for the next recession to realize that diversification means more protection! 

Juan Carlos HerreraComment