Other Market Crashes

There have been Other Market Crashes after the Stock Market Crash of 1929. On this page we take a look at the other market crashes.

Stock Market Crash of 1987

With corporate restructuring and leveraging on the rise between 1986 and 1987, stock prices were on the rise.

By August of 1987, the Dow Jones has gone up 800 points - a 41% increase in value. On August 25, 1987 the markets hit a new high when the Dow hit a record 2722.44 points.

In September investors begun to worry. Volatility in the market increase substantially.

And then the Dow started to head down..

On October 19, 1987 (infamously known as Black Monday), the stock market crashed. The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin.

The Dow dropped 508 points or 22.6% in a single trading day. In one day $500 billion vanished just like that!

This was a drop of 36.7% from its high on August 25, 1987.

What caused the crash?

1. Little or No Liquidity - During the crash, the markets were not able to handle the imbalance of sell orders.

2. Overvalued Stocks - stocks were clearly overvalued.

3. Program Trading and the Use of Derivative Securities Software - Large institutional investment companies used computers to execute large stock trades automatically when certain market conditions prevailed.

Some analysts claim that the program trading of index futures and derivatives securities was also to blame.

Following the Crash:

1. Uniform Margin Requirements - New margin requirements were introduced to reduce the volatility for stocks, index futures, and stock options.

2. New Computer Systems - Stock exchanges changed to new computer systems that increased data management effectiveness, accuracy, efficiency, and productivity.

3. Circuit Breakers - The New York Stock Exchange and the Chicago Mercantile Exchange instituted a circuit breaker mechanism, which halts trading on both exchanges for one hour should the Dow fall more than 250 points in a day, and for two hours, should it fall more than 400 points.

The market rebounded remarkably following the 1987 stock market crash. The market began a slow but steady climb almost immediately following the crash. In fact, before the end of 1989, the Dow Jones Industrials would once again be setting new highs.

This is mostly attributed to the fact that the underlying fundamentals of the market were still strong and the Federal Reserve took quick action in the months following the crash to bolster international confidence in the American economy.

The Crash of 2000

Beginning 1992-2000, the markets and the economy experienced a period of record growth.

Consider the following:

In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading.

By September 1, 2000, the Nasdaq was trading at 4234.33.

From September 2000 to January 2, 2001 the Nasdaq dropped 45.9%.

By October 2002, the Nasdaq had dropped to a low of 1,108.49. This was a 78.4% decline from its all-time high of 5,132.52 in March 2000.

8 trillion dollars of wealth was lost in this crash.

And in many ways - this was the "dotcom" crash.

By 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.

Causes of the Crash:

1. Corporate Corruption - Many companies fraudulently inflated their profits and - used accounting loopholes to hide debt. Corporate officers enjoyed outrageous stock options that diluted company stock.

2. Overvalued Stocks - Stocks were clearly overvalued. There were numerous examples of companies making significant operating losses with no hope of turning a profit for years to come, yet sporting a market capitalization of over a billion dollars.

3. Daytraders and Momentum Investors - The advent of the Internet enabled online trading –a new, quick, and inexpensive way to trade the markets.

This revolution led to millions of new investors and traders entering the markets with little or no experience.

4. Conflict of Interest between Research Firm Analysts and Investment Bankers - It was common practice for the research arm of investment banks to issue favorable ratings on stocks for which their client companies sought to raise capital.

In some cases, companies received highly favorable ratings, even though they were actually in serious financial trouble.

Following the Crash:

1. New Rules for Daytraders - Under the new rules that were introduced, investors needed at least $25,000 in their account to actively trade the markets.

In addition, new restrictions were placed on the marketing methods daytrading firms are allowed to use.

2. CEO and CFO Accountability - Under the new regulations, CEOs and CFOs were required to sign-off on their statements (balance sheets). In addition, fraud prosecution was stepped up, resulting in significantly higher penalties.

3. Accounting Reforms - Reforms including better disclosure of corporate balance sheet information were instituted.

Items such as stock options and offshore investments were required to be disclosed so that investors had a better way of judging if a company was actually profitable.

4. Separation - A clear separation was mandated between Investment Banking and Brokerage Research. The reform instituted was so as to avoid conflicts of interest in the financial services industry.

Stock Market Crash of 2008

Like the other market crashes this crash happened in October.

Prior to the crash,there signs that the financial markets were weak and a crash was eminent.

Before 2007, the sub-prime mortgage industry thrived. Individuals who had poor credit were given access to loans they really could not afford.

Mortgage defaults started to rise. The national economy started to falter. The credit markets begun to freeze up!

But home prices were on the rise - who cared?

Nobody!

Then housing prices started to fall in the fall of 2007.Homeowners found themselves with underwater loans - they owed lenders more than the home was worth.

A number of big investment companies begun to get affected.

Bear Stearns filed for bankruptcy in March 13, 2008 because of a lack of liquidity.

Fannie Mae and Freddie Mac who between them owned or guaranteed nearly $6 trillion in mortgage loans, was forced into conservatorship in September 2008 because of financial distress.

On September 14, 2008, Bank of America agreed to acquire Merrill Lynch for $50 billion as a second wave of volatility began in the financial community.

On September 15, 2008, concerns over the ability of financial institutions to cover their exposure in both the sub-prime loan market as well as credit default swaps led to further market instability. That same day, Lehman Brothers would be forced to file for Chapter 11 bankruptcy.

On September 16, 2008, American International Group would fall victim to a liquidity crisis as AIG's shares lost 95% of their value and the company reported a $13.2 billion loss in just the first six months of the year. By September 22, 2008, AIG was removed from the DJIA, replaced by Kraft Foods.

Clearly the financial markets were quickly headed down.

From Monday (another Black Monday?) October 6, 2008 the Dow Jones would decline 18.% and lose 1,874 point by the end of the week.

In that same week, the S&P 500 would fall more than 20%.

Here is a snapshot of the first 10 trading days of October 2008.

The market would rebound sharply on Monday October 13 and rise 936.42 points only to drop 733.08 points on Wednesday of that same week.

After a brief uptick in mid-October, the market would begin a second decline later that same month. On October 24th, the Dow would fall 312.30 points to 8,378.95 - its lowest level since April 25, 2003.

The S&P 500 would fall 31.24 to 876.77, its lowest level since April 11, 2003.

Finally, the Nasdaq Composite would fall 51.88 points to 1,552.03, its lowest level since May 23, 2003.

Causes of the Crash:

1. Credit squeeze caused by high-sub prime mortgages - As mortgage defaults started to rise, credit markets begun to freeze up!

2. Oil - At the start of 2008 oil was selling at $100 a barrel. Gas prices eventually started going up..ripple effects were being felt by consumers.

3. Heavy Military spending - The Iraq and Afghan war was costing the Unites States a lot of money.

4. Weakening U.S dollar

5. Predatory Lending - practice of unscrupulous lenders, like Countrywide to enter into "unsafe" or "unsound" secured loans for inappropriate purposes.

6. Deregulation - the regulatory framework did not keep pace with financial innovation, such as the increasing importance of the shadow banking system, derivatives and off-balance sheet financing.

I hope you enjoyed reading about the Other Market Crashes of 1987, 2000, and the recent Market Crash of 2008.



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