A 40% drop is a catastrophic event in the financial markets, known as a severe bear market or even a crash. These events are rare, but they are seared into the collective memory of investors because of the immense financial and psychological damage they cause.
Here’s a breakdown of how often it has happened and the historical context.
How Often Has the Stock Market Fallen 40% or More?
In the modern history of the U.S. stock market (primarily using the S&P 500 and its predecessor indices as a benchmark), a peak-to-trough decline of 40% or more has occurred only a handful of times.
Since 1900, there have been five such devastating declines:
The Great Depression (1929-1932): The mother of all market crashes. The stock market plummeted nearly 90% at its worst point. A 40% drop was passed early on in a long, terrifying slide.
Cause: A speculative bubble, a banking crisis, and catastrophic economic policy (protectionist tariffs, monetary contraction).
Recovery Time: It took until 1954 for the market to regain its 1929 peak—over 25 years.
The 1937-1938 "Recession within a Depression": After a partial recovery from the lows of 1932, the market experienced another sharp drop of about -60% from its 1937 peak.
Cause: Premature fiscal and monetary tightening by the government and the Federal Reserve.
Recovery Time: The market did not sustainably exceed its 1937 peak until the post-WWII boom in the late 1940s.
The 1973-1974 Bear Market: A brutal, grinding bear market where the S&P 500 fell -48%.
Cause: The OPEC oil embargo, skyrocketing inflation ("stagflation"), and the collapse of the "Nifty Fifty" blue-chip stocks.
Recovery Time: It took 7.5 years for the market to reach a new inflation-adjusted high in 1982.
The 2000-2002 Dot-Com Crash: After the implosion of the tech bubble, the S&P 500 fell -49%.
Cause: Speculative mania in internet and technology stocks with no earnings, followed by a severe recession and the 9/11 attacks.
Recovery Time: The S&P 500 reached a new nominal high in 2007, but when adjusted for inflation, it did not fully recover until 2013.
The 2007-2009 Financial Crisis: The S&P 500 plunged -57% at its nadir.
Cause: A housing bubble, a crisis in subprime mortgages, and a resulting global financial system meltdown.
Recovery Time: The S&P 500 reached a new nominal high in 2013, about 5.5 years after the peak.
Comments:
In 1973, I remembered the OPEC oil embargo and the stagflation it caused to the economy of the UK. No knowledge of the impact on the stock market, but did noted the prices of properties dropped a lot. Bank interest rates were sky high (> 10%) at one stage as the central bankers tried to reign in inflation. Lesson learned: despite the high interest rate, your cash actually lost value due to the high inflation.
I witnessed the October 1987 crash. Still remembered the exact day as I happened to be with a stock broker, who lamented how this was going to affect the whole industry severely. Just started my career and had not invested in the market then. But it was educational watching the market crashed and rose rather quickly. However, the impact on the stockbroking industry was real for those who were part of it.
My first stock was bought in 1993. How intelligent was I in my investing? On hindsight, I was not intelligent at all. My buying and selling was based on tips, rumours, greed and fear. I was very lucky to have an experienced investor who recommended me to buy certain counters and because I believe and know his ability and knowledge, I followed with his recommendations with little hesitation. His briefing to me on the stock was often a less than 2 minutes brief. "I think you should look into buying some of this company. It is doing this and that. It is a good company and its results have been this and that. It also gives good dividends."
Well, I did build up a portfolio of stocks. Hardly look at the portfolio, as I was far too busy with my more important work. It was fun seeing the portfolio value rose with the bull market of that time. By 1994 or 1995, I felt something wasn't right. Here I was working so hard to make a living but my customers and friends were all having a gala good time being rewarded by the stock market. Teachers left their job to do multilevel marketing, as there were so much easy money there. Accountants wanted to join as stockbrokers and there was a queue to be accepted. House prices were up. Economic activities were hot. You couldn't be admitted to a hospital in Klang Valley, as the private hospitals ran out of bed space. Restaurants were packed. Employment was full and there was shortage of labour in many industries. Many offices placed TV in their workplace to watch the teletext. A speculator boasted for many months how he invested in the morning, and by the afternoon, he made RM 5,000. Funnily, these observations made me uneasy. Though I did not sell, I felt things were not right and I actually held back on my investing from 1995, observing the market going up and up over the next 2 years by the side-line. How did I feel? Having lunch with colleagues, and hearing them making money in stocks and you know you should know your risk tolerance and financial capacity. Cash built up in the banks during that stage. I just shut out the noise and the hypes as I felt the market was just too high. Did I know how to value stocks at that time? Not really. Just a hunch only.
On the fateful day in October 1997, I was at a meeting overseas. The conversation among the attendees focused on what was the start of the Asian Financial Crisis. The Thai bath had fallen in value by a huge amount. Malaysia was not affected yet. Little did we realise Malaysia would be affected soon. The Malaysian ringgit was soon affected. Its stock market crashed too. I was actually elated as I was cash rich and ready to pounce. So many great stocks were sold down. Yet, on hindsight, I was lucky but one of my pick did show up as poor. One of the stock I picked was a stockbroking company. But this was so cheap then. Anyway, this company eventually recovered and it was a gain overall. The Asian Financial Crisis was a very valuable lesson in my investing journey. With money in the game, my portfolio which had gains turned into losses. Did you examine your feelings then? Why did not I sell the stocks? Market was falling and yet the stocks were not sold? Should have sold early, but the prices had already dropped? So and so, a friend, had sold all and was totally out of the market, but the prices were already low. Another shared after holding on for a while that she and her husband sold all their stocks and were now sitting sideline to get in later. They sold at the lowest and a few years later when the market had recovered, they were still not invested. In December 1997, I was in US for a holiday. The exchange rate of US1 to MYR 2.20 had crashed to US 1 to MYR 3.50. Suddenly, you felt everything was more expensive. Luckily, the trip was booked before the crash occurred.
What would you have done? A newbie in the stock market, now sitting with losses in his portfolio. I discussed with my wife that perhaps we shouldn't be in the stock market at all. It is too dangerous. I did plough in more money into the market during the market crash. What I did not know was the market at 600 could drop further. Having not lived through a crash, losing money elicited various feelings. Investing can be emotional, and ability to reign in your emotions is part of intelligent investing.
I lived through the 2000-2002 Dot-Com Crash unscathed, as I was not in the US market then. Internet was not so accessible then. What changed in 2000? During the Dot-Com boom, Warren Buffett was criticized for having lost his touch. Post Dot-Com crash, he became a big hero. Value investing became popular again. I am a voracious reader of books. I spent at least a thousand and more on books every year. Prior to 2000, I was probably reading the wrong books. I read books on personal finance, economics and accounting. There were interesting but not very helpful in investing. Post 2000, investing books started to flood our local bookstores. I probably have collected all the books that are interesting in investing in my library. Also, internet was more accessible and you can learn a lot about investing in the internet too. This consolidated my investing knowledge but can I translate this into practice.
In 2002, I did a thorough analysis of my existing portfolio from 1993. From 1997, after the Asian Financial Crisis, I had lived with the fact that I was carrying a loss in my portfolio of stocks. I hardly sell my stocks as they were all very good companies. Surprisingly, the majority of the stocks had recovered from the low and many were above my buying price. Also, those that have recovered but still below my buying price (capital loss), when the dividends received were added, the dividends added to my buying price of that stock! Surprised by this revelation, I studied the portfolio to learn the valuable lessons it offered. There were many valuable lessons learned. This rewired my thinking, approach and feeling to owning stocks in the market for the long term. This maybe also partly influenced by the book Stock for the Long Run by Siegel.
Feeling confident, after discussing with my wife, we got a "tip" on a stock and I analysed this stock and bought. Alas, the stock went up 100% and a few months later, I actually lost 50%. This was another road-stop sign. I told my wife that we should not buy any stocks again until I know what I am doing.' The story is too long, and I shall stop here for now. :-)
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