A Short History of Market Panics

A Short History of Market Panics (and What they Can Teach Investors)

As investors know all too well, the COVID-19 pandemic has led to panic selling in financial markets. Indeed, to call what we’ve seen “heightened volatility” doesn’t do it justice. Equities crashed from record highs as outright fear gripped the marketplace. 

Even for individuals with a very long-term horizon, the brutal selloff has been unsettling. Add to this some very real economic damage and it would take incredible stoicism not to feel at least some level of anxiety.

At a time like this, we find comfort in history. The current episode is not the first panic experienced by investors (and unfortunately, it will not be the last: these things have a way of rearing their ugly head every now and then). As such, we can look to previous bouts of extreme pessimism for some guidance about the panic of 2020.

Turns out, there is reason for hope amidst today’s despair.

1987: Black Monday

It’s been over 30 years since a day that will live in market infamy. On Monday October 19, 1987, the Dow Jones Industrial Average plunged 22.6%. It remains the largest single drop (on a percentage basis) ever for the index.  The underlying causes of what’s known as “Black Monday” are somewhat technical and actually still debated by experts. 

Yet this much seems clear: after the crash, many people thought stock prices would stay down for a while. One television reporter commented at the time that “more and more analysts believe the bear market is here to stay.” By the end of 1987, however, equities would defy these predictions, erasing all of their losses from the market crash.

September 11, 2001 

The terrorist attacks on U.S. soil on 9/11 caused mass casualties and unsurprisingly also led to turmoil in equities. After being re-opened following four days of being closed, the Dow Jones fell over 7%, as investors feared a wave of new incidents. Equities also suffered as market participants tried to price in the economic cost of the attacks, with significant concerns about whether consumers would curtail spending. 

Incredibly, two months later, the market was actually higher than it was on September 10.

Global Financial Crisis: 2007-2009

Compared to the 1987 and 2001 bouts of panic, the Global Financial Crisis (rooted in the collapse of U.S. house prices) took more time to unfold. Its initial tremors were felt in the summer of 2007, followed by extreme fear among investors in the fall of 2008 when investment bank Lehman Brothers collapsed. From a peak in October 2007 to a March 2009 bottom, the Dow Jones fell almost 54%.

That month marked the start of one of the longest bull markets in U.S. history.

This, Too, Shall Pass

We don’t have a crystal ball for how this pandemic-driven market panic will end. It is possible, of course, that equities have entered a prolonged bear market. It’s also possible that the decline will prove to be brutal yet swift, as in some previous panics.

What we do know is this: when we look back over history, it has not been a winning strategy for investors to cash out amidst widespread panic. Markets are cyclical, and at some point, the current fear will recede.

Investors who stay the course should be well-rewarded for doing so.


1987 stock market crash, original news report from WPIX in New York: https://www.youtube.com/watch?v=0_8YEglCFdU