A short history of share market downturns

Explainers

We look at some notable share market downturns and why it’s always important to look at the big picture (while not forgetting the finer details).

A short history of share market downturns

There’s an old saying that there are only two certainties in life—death and taxes. You could argue that share market downturns are a third. In the past, share markets have gone up, and down (and then up again!).

This might not feel like much comfort if you’ve watched the value of your Portfolio fall during a downturn—particularly if it’s the first time you’ve experienced one as an investor. It can be unsettling, even for people who invest for a living. 

But, it’s also inevitable. Economies and share markets move in cycles, so having the confidence to ride out the ups and downs is one of the most important lessons you can learn as an investor. 

History lessons

A market downturn is when share prices stop trending up, and start falling, usually over a prolonged period (but sometimes breathtakingly fast!). This is typically measured by the performance of a broad market index (like the S&P 500), rather than individual shares.

In some cases, share prices fall enough to create a bear market—this happens when prices drop at least 20 percent from their recent peaks. Over the last century or so, there’s been a bear market roughly every seven or eight years. Some of these were a big deal and have become the stuff of legend (well, the stuff of books and movies and countless articles, at least). 

Black bears

One of the first bear markets in modern share market history is often linked to a single day—29 October 1929, aka Black Tuesday. In reality, share prices had started falling before this, but selling reached fever pitch on Black Tuesday, and the New York Stock Exchange (NYSE) effectively collapsed under the pressure. 

The crash marked the end of the excess and speculation of the ‘Roaring Twenties’—during which consumers and companies built up large debts due to easy access to borrowing—and the beginning of the Great Depression that spread around the world.

Almost 60 years later on 19 October 1987 (also known as Black Monday), global markets plummeted—some by more than 40% in a single day.

Driven by a combination of factors, including rising interest rates, US tax changes, and computer-enabled trading, it also came on the back of a rapid rise in share prices over the previous few years. From August 1982 to its peak in August 1987, the US Dow Jones Industrial Average (DJIA) index gained 250%

Buyer beware     

In the late 1990s, share markets were booming with soaring share prices for tech start-ups. In the early days of the internet’s mass adoption, new online businesses sprung up almost hourly. Low interest rates and the allure of a game-changing new sector meant investors were happy to pay a premium for companies that were good at churning through cash, but not so good at making profits. The Nasdaq rose 400% between 1995 and March 2000, in what became known as the dot-com bubble

Then interest rates rose and investors started paying closer attention to the numbers behind company valuations. The dot-com bubble burst spectacularly. The September 2001 terror attacks on the US and a series of accounting scandals prolonged the downturn. Between March 2000 and October 2002, the total market value of the companies listed on the NYSE and Nasdaq had fallen by US$9.3 trillion (yes, trillion).  

Five years later, the number of extremely high-risk and complex investment products linked to reckless mortgage lending in the US led to the Global Financial Crisis (GFC) between mid-2007 and early-2009. This saw one of the deepest recessions since the Great Depression, with governments and central banks around the world pulling out all the stops to restore stability. Interest rates were cut almost to zero, banks were propped up with public money, and in 2008, the S&P 500 fell almost 40%.

COVID-19 impacts

More recently, there was a sharp sell-off in 2020 sparked by a health crisis rather than a financial one—specifically, the shock of a global pandemic and sudden disruption in the free movement of people and goods. 

After the initial shock of COVID-19, share markets shot back up quickly, as investors benefited from government financial support and low interest rates. By the end of 2021, there were some booming sectors in global share markets—high-growth tech stocks, for example.

Same, same, but different

Each share market downturn has its unique drivers. However, there are also some common themes linking them. 

Most have been preceded by a steep run up in share prices. This was often spurred by low interest rates and easy access to credit, which encouraged people to consider riskier investments that offered potentially higher returns. In turn, this helped to inflate the valuation of those companies. 

As history shows, these runs don’t last forever. At some point, investors can become nervous about the prices they’re paying for companies versus what their balance sheets suggest they’re worth. Often that ‘something’ will be the central bank hiking interest rates to try rein in inflation. 

Another thing all share market downturns have in common is that they’ve eventually been followed by a recovery in prices. Some downturns or bear markets are very short-lived, like the one in the pandemic’s early days. Others see share prices falling or stagnating for a few months, or even years. But—to date—they’ve never stayed that way.

Chart showing that over the past 5 years, the S&P 500 index level has nearly doubled.

This doesn’t mean that every investment eventually gets away scot free. While the share market as a whole might recover, there’ll likely be individual investments that weren’t able to outlast the market dip, or will never properly recover. 

Wrapping up

Historically, most major share markets have dusted themselves off after a sell-off and gone on to new record highs—because markets tend to overshoot, on the way up and on the way down. 

Whether we’re in a bear market, a bull market, or somewhere in between, keep in mind that the ups and downs of the share market are all part of the journey. It also pays to remember some of the core principles of investing: 

  • Invest an affordable amount, regularly. This strategy aims to smooth out the inevitable ups and downs in prices along the way.

  • Make sure you diversify. Investing in lots of different asset classes, industries, countries, or funds helps you to manage the risks affecting a single sector or region. Don’t put all your eggs in one basket!

  • Understand your investment horizon and consider the long term, so you know how much time you have up your sleeve to ride out a dip and potential recovery. 

  • Do your due diligence. There’s no guarantee that an investment will make it through a market dip, so investment decisions shouldn’t be made based on past performance. Make sure to read disclosures (like offer documents or Product Disclosure Statements) and understand the risks of an investment before making the decision to invest. 

For more info about how to invest when the share market dips, check out our Learn article.

Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.

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