Get the Right Perspective on the Market Drop

August 1st, 2008

After the market has dropped more than 20% and despite some encouraging recent earning reports, most analysts now agree that the U.S. market is already in recession. All of us have heard about the burst of the housing bubble, the banking bankruptcy crises, overextended consumer credit and more. The U.S. economy is surely slowing and is expected to grow much slower than the global rate of growth. However, if you thought that this decline is painful, think again! A 20% drop is significant, but it is only a relatively small fluctuation compared to the five (and even the ten) worst markets crashes in U.S. history.

The king of all crashes is the 1932 stock market crash. During the 810 days between April 1930 and August 1932, the market dropped 86%! Combined with the crash of 1929 (the 4th worst crash in the list), this created the greatest depression of all time. To recover from a loss like that, you need to increase your portfolio value by 615%! This was very difficult considering the fact that the market didn’t fully recover until 1954, 22 years later.

The second worst crash was the 1937-1938 crash. Five years after the end of the 1932 depression, when investors thought the market was finally on the right track, the market plunged again by 49% due to the war scare and Wall Street scandals.

The “Panic of 1907″, the stock market crash during 1906-1907, was the 3rd worst crash. Its primary cause was a retraction of loans by some banks that began in New York City and soon spread across the nation, leading to the closing of banks and businesses (sounds familiar…). To bring relief to the situation, the U.S. Treasury Department bought 36 million dollars worth of government bonds to offset the decline.  However, only after J.P. Morgan stepped in and redirected money between banks and bought plummeting stocks of healthy corporations, the panic passed and the crash was over.

The next two crashes are the deadly 1929 crash, when the market declined by 48% in only two and a half months (!), and the post World War I boom crash, the 1919-1921 crash were the market dropped 46.5% (after it rose for more than 51%…). The 1929 crash was the shortest of all market crashes, but it kicked off what we now know as the Great Depression, which lasted until 1954.

Considering the large declines of these crashes can help you see the current bearish market decline in the correct perspective. Although these crashes were devastating, it is important to remember that after they bottomed the recovery was sharper and quicker than the declines. Excluding two cases in history, the patient stock market investors who held their stocks steadily and patiently came out of the crash on top.

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Entry Filed under: Stock Trading Investing Basics