1. Market Crashes: Introduction
  2. Market Crashes: What are Crashes and Bubbles?
  3. Market Crashes: The Tulip and Bulb Craze (1630s)
  4. Market Crashes: The South Sea Bubble (1711)
  5. Market Crashes: The Florida Real Estate Craze (1926)
  6. Market Crashes: The Great Depression (1929)
  7. Market Crashes: The Crash of 1987
  8. Market Crashes: The Asian Crisis (1997)
  9. Market Crashes: The Dotcom Crash (2000-2002)
  10. Market Crashes: Housing Bubble and Credit Crisis (2007-2009)
  11. Market Crashes: Conclusion

What is a Bubble?

A bubble is a type of investing phenomenon that demonstrates the most basic type of "emotional investing." A bubble occurs when investors put so much demand on a asset that they drive the price beyond any accurate or rational reflection of its actual worth. In the case of a stock, the actual worth would ideally be determined by the performance of the underlying company. Like the soap bubbles a child likes to blow, investing bubbles often appear as though they will rise forever, but since they are not formed from anything substantial, they eventually pop. And when they do, the money that was invested into them dissipates into the wind. (See also: 5 Steps of a Bubble)

What is a Crash?

A crash is a significant drop in the total value of a market, almost undoubtedly attributable to the popping of a bubble, creating a situation wherein the majority of investors are trying to flee the market at the same time and consequently incurring massive losses. Attempting to avoid more losses, investors during a stock market crash often resort to panic selling, hoping to unload their declining stocks onto other investors. This panic selling contributes to the declining market, bringing about the eventual crash that affects all the market participants as well as seemingly unrelated aspects of global finance. Typically crashes in the stock market have been followed by a depression.

Crashes Versus Corrections

It is important to note the distinction between a crash and a correction, which can be a bit sticky at times. A correction is supposedly the market's way of slapping some sense into overly enthusiastic investors. As a general rule, a correction should not exceed a 20% loss of value in the market. Surprisingly, some crashes were erroneously labeled as corrections at various points in the drop, including the terrifying crash of 1987. Although there is a lot of overlap between the terms, we usually use the term correction for a period of time when an asset or asset class drops over 10% in value but doesn't exceed the 20% threshold. 

Only the Greatest Crashes Need Apply

For crashes, we are most often talking about losses greater than 20% over a relatively short timeframe and we look for impacts beyond the directly affected asset class. For example, the crash of oil prices from July 2014 to February 2015 exceeded 40%, but the ripple affects were not uniformly negative across the global economy. The major market indicators during this period wavered a bit, but offsetting strength in industries that benefit from low fuel prices kept the overall market trending up. So while it was a crash for oil prices, producers and service companies, the 2014-15 oil crash did not make the list of greatest market crashes because its effects were not widespread enough to move the needle.

Contrast this with the housing bubble and credit crisis. That particular mess nearly ruined the global economy and required unprecedented financial intervention on an international scale to manage the damage. Not all of the crashes will live up to that lofty standard. Many of the historical crashes need to be judged by the economic activity of the time. As the global economy has grown and integrated, the resilience to crashes has also increased due to the fact that there are many more sectors and economies to pick up the slack when one particular one struggles, as with the oil price crash mentioned above. So the bar on what it takes to shake the global economy continues to rise over time. For investors, that is a welcome development.   

Now that we're familiar with the definitions of crashes and bubbles, we can look at how they occurred throughout history


Market Crashes: The Tulip and Bulb Craze (1630s)
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