Can the Stock Market Crash Again?
The Great Stock Market Crash of 1929 usually marks its anniversary with the usual question: "Could it happen again?" Historians continue to study the Crash for answers to questions about what triggered the loss of 89% of the market’s value over almost three years and what lessons can be learned.
The financial industry has instituted some new safeguards to hopefully prevent a catastrophic crash.
Two ways to measure stock market losses are to count the percentage lost, or the points lost.
Margin Requirements and the Crash
Before the 1929 Crash investors could buy stock on the margin, putting a small amount down (such as 25%) and borrowing the rest from the bank. Margin trading wasn't regulated at the time. When prices began falling, traders hurried to sell to halt losses—which then led to a downward spiral of panic selling.
In 1929, volume overwhelmed the market as investors rushed to cover their margin borrowing, and banks called in loans. October 29, 1929 was "Black Tuesday" happened, and the Dow Jones crashed 25% over two days.
Lesson Learned: Margin Account Regulation
Margin requirements are much tighter now and not every investor is eligible for a margin account. There are rules governing how much you must have to open an account, how much you can borrow, and how much you must keep in your account at all times. There are essential minimums set by regulatory authorities, but brokerage firms may have additional rules, as well.
As the SEC warns, it's still possible for investors to lose money very quickly, if using margin accounts.
Tech Problems and the Another Crash
The worst day in market history (as measured by percentage lost) didn’t occur in the 1929 crash, but in more modern times on October 19, 1987. The stock market lost 23% in just one day.
In this case, the trading systems were overwhelmed with volume. As the buying panic rose, complex programs kicked in and began issuing more sell orders. These automated systems added fuel to the fire and once again contributed to a fast-paced downward spiral of lower prices and panic selling.
When the dust had settled, over $1 trillion in value had disappeared from the market.
Lesson Learned: Trading Halt Triggers
Since then, the U.S. Securities and Exchange Commission established restrictions or "circuit breaker points" to cool down sudden market volatility and sell-offs that are effective across all markets:
- If the S&P Index drops 7% before 3:25 p.m. EST, trading will pause for 15 minutes.
- If trading resumes and drops to 13%, trading pauses for another 15 minutes.
- If either drop occurs after 3:25 p.m., trading continues.
- If the S&P Index drops 20% at any time of day, trading will end for the rest of the day.
Significant events, such as the tragedy of September 11, 2001, can cause markets to not open at all or close them early, to prevent a panic-selling situation.
The Bottom Line: Can a Crash Happen Again?
These are only a few of the measures to prevent the type of Crash that occurred in 1929 or in 1987. Will they work? Can there be another crash? No one can say for sure, however, it is reasonable to assume that there many people working every day to make sure it doesn’t.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Federal Reserve History. "Stock Market Crash of 1929." Accessed March 11, 2020.
Mintz, S., & McNeil, S. "Digital History, Chapter 4: Rise and Crash." Accessed March 11, 2020.
Federal Deposit Insurance Corporation. "Historical Timeline: The 1920s." Accessed March 11, 2020.
U.S. General Accounting Office. "T-HRD-88-21 Effect of the 1987 Stock Market Decline on Selected Large Pensions," page 2. Accessed March 11, 2020.
Securities and Exchange Commission. "Statement on Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds." Accessed March 11, 2020.
U.S. Securities and Exchange Commission. "Investor Bulletin: Measures to Address Market Volatility." Accessed March 11, 2020.