This month marks five years since the Covid market slump.
The initial recession on March 9, 2020 was dramatic, but US stock markets lost nearly 8% in one day, while US stock markets eventually recovered from that crash in just four months, making it the fastest recovery of a market crash in the last 150 years.
Even two years later, the stock market was still sluggish. It took the market four times longer (18 months) to recover from the crash fall in December 2021.
So, what have we learned as these recent market crashes are behind us?
- It is impossible to predict how long it will take to recover in the stock market.
- If you panic and sell your stock when the market crashes, it will pay off in the long run.
While Covid's crash fall and Ukraine/inflation slump may be the freshest memories, these lessons are also true regarding all other historic market crashes. They had different lengths and severity levels, but the market always recovered and advanced to new highs.
This is what we have learned from the decline in the market over the past 150 years.
How often do market crashes?
The number of market crashes depends on the degree to which they return to history and how they are identified.
Here we look at the data compiled for the book by former Morningstar research director Paul Kaplan. Insights into the global financial crisis. Kaplan data includes monthly stock market returns in the United States date back to January 1886 and annual revenues over the period 1871 to 1885.
In the chart below, each bare market episode is shown by a horizontal line. This starts with the peak accumulation value for the episode and ends when the accumulation value recovers to the previous peak. (Note that the term “market crash” is used interchangeably with bare markets, which is usually defined as a decrease of 20% or more.)
Incorporating the effects of inflation, the $1 (US$1,870) invested in the hypothetical US stock market index in 1871 had grown to $31,255 by the end of January 2025.
That huge dollar growth highlights the great benefits of maintaining investments in the long term.
Still, it was far from steadily increasing over that period. There were 19 market crashes along the way, with varying levels of severity. Some of the most severe market crashes include:
- Great Fear PrepressionIt started with the crash in 1929. This 79% stock market loss was the worst decline of the past 150 years.
- Lost 10 Yearsincluding both the Bubble Burst and the Great Recession. however The market has begun to recover After the dot-com bubble burst, it did not return to its previous level before the 2007-09 crash. It didn't reach that level until May 2013. More than 12 years after the first crash. This period was the second decline in the last 150 years, and ultimately included a 54% stock market loss.
- Inflation, Vietnam, and Watergatewhich began in early 1973 and ultimately led to a 51.9% decline in the stock market. Factors that contributed to this bear market include high inflation caused by the OPEC oil embargo, as well as civil unrest associated with the war in Vietnam and the Watergate scandal. This market slump is particularly relevant to today's environment given issues such as the recent inflation surge and the Russian-Ukraine-Hamas war.
These examples illustrate the frequency of market crashes. These events are important at the moment, but in reality, there are actually events that happen about once every decade.
How to measure market crash pain
How do you assess the severity of a market crash? That is what Kaplan's “pain indicator” measures. This framework considers the degree of decline and how long it took to return to the previous level of cumulative values.
How it works: The pain indicator is the ratio of area between the cumulative value line and the peak line from peak to recovery compared to that region for the worst market decline since 1870. In other words, the first part of 1929/Greater Prass had a 100% pain index, and the percentage of other market crashes is nearing its severity level.
For example, consider that the market experienced a 22.8% drop around the Cuban missile crisis. The 1929 crash caused a 79% drop, 3.5 times. It's already important, but I believe the market took four and a half years to recover after that valley, but less than a year to recover after the valley of Cuba's missile crisis. Therefore, taking this time frame into consideration, the pain index tells us that the first part of the Great Fear pression is 28.2 times worse than the slump of the Cuban missile crisis.
The table below shows the bear market over the past 150 years. This is sorted by including the severity of the market decline and its pain indicator.
As you can see, the market slump in December 2021 (the result of the Russian Ukraine War, severe inflation and supply shortage) ranks 11th on this list. By comparing this market crash with other market crashes on the table, we can see that 28.5% of the stock market over the nine months is more painful for the stock market than the Cuban missile crisis or some recessions of the late 1800s/early 1900s.
And the COVID crash in March 2020 was actually the most painful of these 19 crashes, as the recovery afterwards became faster. The recession was sharp and severe (it fell 19.6% in about a month), but the stock market ultimately recovered to its previous levels four months later.
Five most severe market crashes of the past 150 years
To better assess the impact of some of the most severe recessions of the past 150 years, follow the $100 path at the start of each market crash.
- World War I and the flu. After peaking in June 1911, the market began to decline quickly due to the conglomerate breakup Like a standard oil company And the American tobacco companies – and the worst part of this recession began in July 1914 when World War I broke out. The stock market continued to decline for the next few years (it lowered its $100 investment to $49.04) and did not recover until after the 1918 flu pandemic.
- The crash and the Great Repression of 1929. If they had invested $100 in the stock market during the 1929 conflict, by May 1932, their value would have fallen to $21. This crash ultimately became unsustainable when it led to the economic boom after World War I (overconfidence, overexpenditure, and overspreading in prices).
- Great Repression and World War II. Recovery from the first part of Great Fear Presion did not last long. The stock market had recovered to its 1929 high by November 1936 (our investments recovered to a value of $100, etched slightly to $100.23), but began to decline again in February 1937. Changes in fiscal policy, It includes factors such as bank reserve levels of contraction and social security taxes in conjunction with the effects of World War II. The investment sank to $52.49 in March 1938, and eventually recovered to $104.88 by February 1945.
- Inflation, Vietnam, and Watergate. In 1973, members of the Middle East of OPEC imposed An Oil embargo This led to serious inflation in the US. In addition to the chaos surrounding the withdrawal of troops from Vietnam and later political uncertainty. Watergate scandalthe stock market fell 51.9% during this period. This brings the $100 investment to $48.13. It took me more than nine years to recover from this slump.
- Lost 10 Years (.com Bust and the Global Financial Crisis). The dot com bust started when the advanced prices of internet and technology companies reached a breakpoint and lost almost every profit they had done before. The $100 investment in August 2000 would have fallen to $52.76 in value. Seven years later, the stock market has almost returned to its previous level ($95.25) when the housing bubble burst and mortgage-backed securities began experiencing losses. Great recession (The value of the investment has decreased to $46). Overall, there has been a 54% decline over the last 12 years.
The market ultimately recovered from the Great Recession in May 2013, but it continued to be a COVID market crash and a recession in the second half of 2021.
There have also been some shorter, more severe market declines over the last 150 years. Think about it Rich man's paniccaused by President Theodore Roosevelt's attempt to dissolve a large corporation. or The exposed brother crisis: When the state faced a coup in 1891, numerous investments in Argentina from Bings Bank suffered.
But even if these blips are in the middle, if $100 was invested at the beginning of the new millennium, it would be worth more than $300 as of January 2025. If $100 was invested in 1870, it is worth $3,125,500 today.
Lessons learned about navigating stock market volatility
So, what does this history tell us about navigating unstable markets? Mainly, they are worth navigating.
After a stressful few months in the first half of 2020, the market has recovered, as did after a 79% decline in the early 1930s. That's the key. Market crashes are always scary when they happen, but there is no way to know if they will encounter minor fixes or look down at the barrels of the next Great Fear Presion.
Still, history shows that the market will ultimately recover, even if you look down at the barrels of the next Great Fear Presion.
However, the path to recovery is so uncertain, the best way to prepare is to own a well-delivered portfolio that fits your time vision and risk tolerance. Investors who continue to invest in the market in the long term will receive rewards that make the disruption worthwhile.
This article includes data and analysis from former research director at Morningstar Canada, Dr. CFA, Dr. Paul Kaplan.
Data journalist Bella Albrecht and editor-in-chief Lauren Solberg also contributed to this article.
