How Does the 2020 Stock Market Crash Compare With Others?
Latest Dow declines among worst in terms of point, percentage drops
The stock market crash of 2020 began on Monday, March 9, with history’s largest point plunge for the Dow Jones Industrial Average (DJIA) up to that date. It was followed by two more record-setting point drops on March 12 and March 16. The stock market crash included the three worst point drops in U.S. history.
The drop was caused by unbridled global fears about the spread of the coronavirus, oil price drops, and the possibility of a 2020 recession. Only two other dates in U.S. history had more unsettling one-day percentage falls. They were Black Monday on Oct. 19, 1987, with a 22.61% drop, and Dec. 12, 1914, with a 23.52% fall.
Although this dramatic 2020 market crash is still fresh in everyone’s mind, let’s take a closer look at what happened and why. That will allow us to anticipate what may happen next with the economy.
Fall From Record High
The 2020 stock market crash began on Monday, March 9. The Dow fell 2,013.76 points that day to 23,851.02. It had fallen by 7.79%. What some labeled as Black Monday 2020 was, at that time, the Dow’s worst single-day point drop in U.S. market history.
On March 12, 2020, the Dow fell a record 2,352.60 points to close at 21,200.62. It was a 9.99% drop, almost a correction in a single day. It was the sixth-worst percentage drop in history.
On March 16, the Dow hit a new record. It lost 2,997.10 points to close at 20,188.52. That day’s point plummet and 12.93% freefall topped the original October 1929 Black Monday slide of 12.82% for one session.
Prior to the 2020 crash, the Dow had just reached its record high of 29,551.42 on Feb. 12. From that peak to the March 9 low, the DJIA lost 5,700.40 points or 19.3%. It had narrowly avoided the 20% decline that would have signaled the start of a bear market.
On March 11, the Dow closed at 23,553.22, down 20.3% from the Feb. 12 high. That launched a bear market and ended the 11-year bull market that started in March 2009.
The chart below ranks the 10 biggest one-day losses in DJIA history.
Compare to Previous Black Mondays
Before March 16, one previous Black Monday had a worse percentage drop. The Dow fell 22.61% on Black Monday, Oct. 19, 1987. It lost 508 points that day, closing at 1,738.74. On Black Monday, Oct. 28, 1929, the average plunged 12.82%. It lost 38.33 points to close at 260.64. It was part of the four-day loss in the stock market crash of 1929 that started the Great Depression.
Causes of the 2020 Crash
The 2020 crash eventually occurred because investors were worried about the impact of the COVID-19 coronavirus pandemic. COVID-19's mortality rate so far is more deadly than the seasonal flu's rate, but that’s because many more cases of the flu are reported annually. Although less deadly than SARS’s death rate in 2003, COVID-19 is spreading more quickly. On March 11, the World Health Organization (WHO) declared the disease a pandemic. The organization was concerned that government leaders weren’t doing enough to stop the rapidly spreading virus.
The stresses that led to the 2020 crash had been building for a long time.
Investors had been jittery ever since President Donald Trump launched trade wars with China and other countries. By Feb. 27, the Dow had skidded more than 10% from its Feb. 12 record high. It first entered a correction when it closed at 25,766.64.
Often, a stock market crash causes a recession. That’s even more likely when it’s combined with a pandemic and an inverted yield curve.
An inverted yield curve is an abnormal situation where the return, or yield, on a short-term Treasury bill is higher than the Treasury 10-year note. It only occurs when near-term risk is greater than in the distant future.
Usually, investors don't need much return to keep their money tied up just for short periods of time. They require more to keep it tied up for longer. But when the yield curve inverts, it means investors require more return in the short term than the long term.
On March 9, investors demanded a higher yield for the one-month Treasury bill than the 10-year note. Specifically, the yield curve was:
- 0.57% on the one-month Treasury bill
- 0.33% on the three-month bill
- 0.38% on the two-year Treasury note
- 0.54% on the 10-year note
- 0.99% on the 30-year Treasury bond
Investors were telling the world with this market signal that they were so worried about the impact of the coronavirus over the next month that they needed a higher return on the one-month bill than for the 10-year note.
Inverted yield curves often predict a recession. The curve inverted before the recessions of 2008, 2001, 1991, and 1981.
In addition, bond yields across the board were at historically low levels. Investors who sold stocks in the crash were buying bonds. Demand for bonds was so high that it drove down yields to record-low levels.
How It Affects You
If you have retirement savings or other funds invested in the stock market, the crash lowered the value of your holdings. When something like this happens, many people panic and sell their stocks to avoid losing more. But the risk with that strategy is that it’s difficult to know when to re-enter the market and buy again. As a result, you could lose more in the long run, if you miss important market gains in the shorter term. On average, bear markets last 22 months. But some have been as short as three months. Most financial planners recommend you sit tight and wait it out.
Strong demand for U.S. Treasurys lowered yields. Interest rates for all long-term, fixed-interest loans follow the yield on the 10-year Treasury note. As a result, interest rates on auto, school, and home loans should also drop to record-low levels. Keep in mind that, even if 10-year Treasury yields fell to zero, mortgage interest rates would be a few points higher. Lenders must cover their processing costs.
In a surprise move on March 15, 2020, the Federal Reserve cut its benchmark interest rate a full percentage point to zero. It also launched a bond-buying program, referred to as quantitative easing, to mitigate the expected damage to the U.S. economy from the coronavirus.
Is a Recession Next?
The bad news is that the combination of a stock market crash and an inverted yield curve can signal a looming recession. A pandemic often slows economic growth, as businesses slow or close and people stay home to nurse their illness or avoid catching it. These factors could easily trigger a recession.
So it makes sense to add to your savings now, if possible, to make sure you have three to six months of living expenses on hand. If you have enough cash on hand, then buying stocks isn’t a bad idea, because prices are low. The driving forces behind the stock market crash of 2020 are unprecedented, but strategies to survive such crashes and recessions have been proven to work throughout history.