For decades the stock market has been regarded as the most reliable form of investment that our modern economy has to offer. The 10% annual return that the S&P 500 produces is a testament to how powerful the American economy is. Yet, for some people, especially younger people, the memories of the 2007 financial crisis still linger in the back of their minds.
The crash of 2007 and the great recession that succeeded it was indeed harsh and unforgiving for investors. Billions of dollars were lost, and the world economy had entered into a deep recession that took nearly a decade to recover from.
But I am here to tell you that you need not worry about any stock market crashes in the future. People that lost in 2008 were the ones that either sold out of the market or were invested in risky companies. From what happened back then, the market may seem to you like a risky place to put your money. But I can assure you that it isn’t, and I can prove it just by looking at the market’s history.
The Stock Market Crash of 1929
The stock market crash of 1929 was caused by a mix of inflated stock prices, too many investors buying on margin; and a lack of government intervention. The crash was seen initially as exclusive to the stock market, but a few months later the banks started having a crisis of their own. The banking crises then inevitably resulted in the great depression spreading throughout the country and the entire world.
A common judgment is that stocks took nearly 25 years to recover from the lows of 1929, all the way up to the year 1954.
Now, this can seem extraordinarily long and excessive for somebody waiting to break even on their money. Afterall most investors don’t have 25 years to spare, especially ones that are ready to retire.
Yet, these facts do not paint the entire picture. Back in 2009, a financial journalist by the name of Mark Hulbert came up with a theory that the break-even point for the average investor back in 1929 was only 4.5 years.
The stock market crash of 1929 is the largest market loss ever recorded in history, so if returns didn’t even take half a decade to recover, then investors should flourish over that thought.
Hulbert bases his theory on 3 pieces of data:
- The Dow Vs the Market
The effects of deflation and inflation are generally never considered when determining stock market gains from after the crash of 1929. The great depression was for sure, a major deflationary period. Deflation was at its highest from between the years 1930 and 1934; it’s entirely likely that the value of investors’ money was not equal to that of the 1929 lows.
Company dividend yields were high in the early 1930s. Dividends are meant to be reinvested, so with high dividend yields, along with the combined effects of deflation; the average investor was probably earning more than what you would presume by just looking at a chart.
The Dow Vs the Market
This one may come as a surprise since the Dow is usually the preferred indicator of how the general market is doing. The only thing is that the Dow is composed of only 30 of the largest companies in the United States.
This means that the Dow can’t be a 100% estimation of the market since the U.S. economy is composed of more than just 30 companies.
The Dow Jones Industrial Average had certain companies removed from it during the Great Depression. Certain companies such as IBM, which was one of the best-performing companies during the 1940s. Without IBM’s removal from the Dow Jones; I think it’s safe to say that the markets could have seen a faster recovery.
Whether you believe Hulbert’s hypothesis or not, I think it’s clear that we don’t get the full story of the market’s recovery after the 1929 crash. To me, it seems believable considering all the factors, that if the average investor in 1929 held on to their investments; their break-even probably wouldn’t take 25 years.
However, I am not entirely sure if investors would have broken even in precisely 4.5 years either.
What I do know is that deciphering the break-even point for stocks during a time such as the Great Depression will take more in-depth research and statistical data.
Stock Market Crash of 1973-1974
One that tends to get overlooked today is the stock market crash of 1973-1974. It’s not as famous as the crash of 1929, nor is it as recent as the 2008 crash.
For many, the year 1973 spelled the beginning of the end for the post-WW2 economic expansion of America; leaving millions unemployed and with rising inflation.
The main causes of the stock market crash of 1973-1974 and the recession were:
- Nixon Shock
- Fall of Bretton Woods System
- Crude Oil Crisis
Keep in mind that the Vietnam War was still going on when this was happening; the U.S. economy was already under a lot of pressure as is.
The recession leads the United States to enter a period of stagflation, which is when inflation and unemployment increase simultaneously.
Nixon Shock and The Fall of Bretton Woods
Nixon shock refers to the economic policies enacted by President Nixon in 1971. His policies were to prioritize economic growth by increasing the number of jobs.
Bretton Woods was a system of fixed exchange rates that linked the U.S. dollar’s value to that of gold. Nixon’s policies resulted in the fall of the Bretton Woods system, lifting the U.S. dollar’s dependence on gold.
Together, Nixon’s policies were enough to shock the stock market, and subsequently brought the U.S. economy into a recession for almost a decade.
Crude Oil Crisis
The oil crisis of 1973 began as an embargo by OAPEC as their response to nations whom they perceived were supporting Israel. The countries targeted by the embargo included Canada, the United States, and the United Kingdom.
The price of oil ballooned, worsening the already troubled U.S. economy.
Despite several economic burdens and the lingering Vietnam War, the American economy prevailed.
Stocks would take around 7 years to recover from the lows of 1974 with dividends and inflation considered. Even during one of the worst economic and political periods since WW2, American stocks still stood their ground.
The Stock Market Crash of 1987: Black Monday
On Monday, October 19th, 1987, the stock market took a sharp nosedive downward in a single day. When you compare the two charts the losses almost seem like the crash of 1929.
But on October 19th, 1987 the market did crash causing the Dow to plunge 22% in a single day.
It’s still up to debate as to what caused the crash of 1987, but most agree that the emerging usage of computer-based trading systems was to blame.
Circuit breaker rules were later put into place to help and prevent an automatic sell-off like this one from happening again.
So, then if the stock market is that fragile to where a computer can cause a crash, you probably shouldn’t have your money in it right? Wrong.
Following the crash of 1987, the S&P 500 received a 417% increase over the next decade. Black Monday didn’t result in a recession, unlike most major stock market crashes.
That decade was the 1990s and during this time we can see the emergence of technology companies. For the investor that held on to stocks in the late 80s, the next decade would reward them with hefty returns.
The Tech Bubble
In the early 2000s technology companies that were overvalued by the markets began to show their true colors. Most of these companies weren’t profitable at all resulting in a major burst in stock prices.
Throughout the 1990s, investors would put money into any company that was related to technology in some way. Just by having a .com at the end of a website would have been enough for funders to invest in a company.
This resulted in a huge bubble in the stock market. Investors were bidding up the share prices of these companies to ridiculous levels.
The technology boom was a new thing on Wall Street at the time, many people were optimistic about it and how a new industry would bring in tons of corporate profit.
The tech bubble officially burst on March 10th, 2000.
September 11th Attacks
About a year after the tech bubble burst, a surprise event happened in the United States that spooked not only the stock market but the entire nation.
The World Trade Center, the Pentagon, and a field in Pennsylvania (failed to reach the target) were the targets of the commercial airliners hijacked by 19 terrorists.
The pure shock of the attacks caused Wall Street to shut down from September 11th to the 17th. With the level of shock and panic going on, the shutdown was done to prevent panic selling.
Massive selloffs occurred following the reopening of the markets in travel and airline stocks. Hitting a record low of $2.93 two years after the attacks, American Airlines stock suffered major losses.
However, the lingering thought of the U.S. entering another war in the Middle East spiked trading in other industries.
Despite the combined effects of both 9/11 and the tech bubble, the American economy remained strong; the stock market would eventually recover in about 4 years.
The Stock Market Crash of 2007 and The Housing Bubble
The 2007 housing bubble was the second-largest market crash in history. I have discussed what caused the crash in more detail on my other post, “What Is a Synthetic CDO?“.
These 4 catalysts precipitated the crash of 2007:
- Toxic Mortgage loans
- Lenient mortgage loan policies
- Investment Banks over diversifying
The level of people defaulting on their mortgages was insane and the crash resulted in the collapse of both Lehman Brothers and Bear Sterns; two massive American investment banks.
The collapse of both Lehman and Bear Sterns created a chain effect throughout the world economy. These corporate giants were around for centuries, so for them to just go like that was a pretty big deal.
The world economy entered what is now known as the Great Recession and did not notice any signs of recovery until the year 2012.
Yet, even with a huge crash such as this, the economy has prevailed resulting in tremendous returns by stocks since 2007.
The Bottom Line
If you’ve previously been scared by the markets and are reluctant to invest your money into stocks; I hope some historical insight can enlighten you. Throughout its history, the United States Stock market has greatly outperformed any other nation on the planet. The businesses that lead the U.S. economy are the best in their industry. American stocks have such a hefty return because of the companies that are behind them.
Throughout everything the nation has been through, the economy has managed to stay consistent and has never stagnated for a prolonged period. The economy is always going through different changes, booms, and busts that constantly create new opportunities.
It’s up to you as the investor to see through that and to not worry about daily, or monthly changes in the market. By looking at the stock market in its entirety, you will learn how to invest for the long haul.
If you have any other suggestions on the topics I’ve addressed or maybe something I didn’t get a chance to cover in this post, feel free to leave a comment. I encourage all of you to share your opinions and thoughts in the comment section below.