The Great Depression of 1929
The Great Depression of 1929 lasted almost a decade until 1939 and led to some fundamental changes in macroeconomic policy. When the First World War ended in 1918, the US economy was making great progress. People were optimistic and bought houses and vehicles, took loans, and made a lot of speculative investments to make profits. However, by 1929, the steam that had gathered momentum began to cool down.
October 1929 saw the markets crash, which in turn led to panic selling that triggered a negative feedback loop. People had borrowed a lot of funds to invest and were highly over-leveraged, so stock prices were over-inflated. The market crashed by 12.82% on the fourth day of the depression and is still remembered as ‘Black Monday’. The consequences of this event were so far-fetched that it took the USA almost a decade to recover from this crash.
Black Monday the 2nd - 1987
The US stock market saw its biggest-ever single-day drop in history in October 1987. Almost 23% of investor wealth was wiped out in a single day, which came to be known as the second ‘Black Monday’. However, this time, technology, over-leveraged borrowings, and speculators also played a role in the downfall.
Before the market crash, leveraged buyouts, corporate takeovers, and financial tools such as margin accounts and junk bonds fueled a surge in stock prices. However, on the day of the crash, the market quickly shifted, with sellers gaining control. This sparked widespread panic, leading to a wave of aggressive selling as investors rushed to exit their positions.
Due to technology enabling faster transactions and order placements, the markets lost more than 20% in one day. This event led regulators to consider installing circuit breakers to protect the markets from such high-intensity and high-risk trading days in the future.
The burst of the dot-com bubble of 1999-2000
After the Black Monday crash of 1987, the USA witnessed the dot-com bubble burst during 1999-2000. However, this one was a more gradual collapse in comparison to the dramatic crashes of earlier. The dot-com bubble grew throughout the 1990s, when internet stocks drew the attention of investors across the board, leading to hyper-inflated stock prices. It was very easy for companies to raise millions in funding and go public easily.
However, by the end of the decade, the reality of the highly inflated stocks started to dawn on investors, and the market saw a huge correction and crashed. Many newly formed internet companies vanished from existence, while several others got delisted from the tech-focused Nasdaq index as it fell from having 5,000 points in the year 2001 to 1,000 in the year 2002.
The Great Recession of 2008
Another crash that the USA witnessed was the Great Recession of 2009, which was caused by financial firms' excessive selling of mortgage-backed securities to investors and banks.
However, the problem started when the prices of these houses started to fall, resulting in low returns for the holders of these securities. As the prices fell, the owners of these homes could not fulfil their debt obligations, which eventually led to the mortgage-backed securities losing their value. Many big financial players had to declare bankruptcy while the investor community held back on funds to protect their liquidity.
Eventually, the US Congress had to bail out the banks by purchasing these securities to infuse some sense of stability into the market. They also dropped interest rates to stimulate the economy and help it survive.
The COVID-19 pandemic
The COVID pandemic saw the world economy shut down to contain the spread of the disease. As a result, businesses, operations, and life as we knew came to a standstill. Given the unpredictability of the event, investors started selling in record numbers to get some liquidity, which, in turn, caused huge fluctuations in the market. The industrial average of the Dow Jones dropped to 26%.
Uncertainty regarding the future of businesses led to a huge drop, which was further amplified by a drop in the levels of consumption of the masses. This led to a drop in business income, causing investors to sell the shares of companies.
