The markets open 2022 with weakness, writes Markus Heitkoetter of Rockwell Trading.

Stock market crashes are not always something that is fun to talk about. We all have to accept that every few years, the stock market can get shaken up, or have a full-blown crash.

Coming off of one of the worst Januarys in recent decades reminds us contrary to popular belief, stocks don’t always go up.

The NASDAQ (NQ=F) had its worst month since January of 2008 which was the start of the global financial crisis sparked by subprime mortgage loans.

The S&P 500 (SPX) and the Dow Jones Industrial Average (DOW) saw their worst respective months since March of 2020, which was the start of the Coronavirus Crash.

What led to the weakness in the markets that started 2022 in the red? It’s no secret that the Federal Reserve is looking to raise interest rates this year, after lowering them for the past couple of years.

Higher interest rate environments always affect growth sectors like technology. As the value of future cash flows reduces, this means current stock prices could be trading at an overvalued multiple. This is the main reason why the tech-heavy NASDAQ hurt harder than the other major indices.

What is a Stock Market Crash?

Before we continue, let’s be clear: one month of tech weakness does not equate to a stock market crash. If the stock market were to crash, you would know. So what exactly defines a market crash compared to just a market decline? A stock market crash is an unanticipated and sudden drop for the entire market. The crash generally occurs after something unforeseen happens. Catastrophic events or if a speculative bubble suddenly bursts.

But this event alone is not usually enough to send the markets into a downward spiral. This, combined with widespread panic selling by both individual investors and financial institutions, sends the markets spiraling. Stock market crashes also do not discriminate between sectors. It is quite normal to see the prices of all stocks sell-off. Compare this to when only high-growth names sell off due to rising interest rates.

We also tend to see other markets decline in sympathy to the stock market. This could include a fall in oil prices or a sharp decline in the value of major currencies. Another signature of a Wall Street crash tends to be the speed at which it happens. A crash isn’t when the stock market steadily declines over a quarter. It is sudden and abrupt, and leads to double-digit losses across every major index in the span of just a few trading days.

October 1929: The Wall Street Crash

October 24, 1929 marked one of the worst crashes in stock market history. Several factors led to the market crash of 1929. You have to first know that this particular crash followed a five-year historic bull run.

Industrial sectors were booming in the United States, which is why it was even more shocking when the stock market came grinding to a complete halt.

You have probably heard of this stock market crash by the nickname of its single worst session: Black Tuesday. Analysts and historians point to the Federal Reserve regulating public utility companies as the straw that broke the camel’s back.

Another factor was an excess supply of manufactured goods and raw materials. This forced companies to rid themselves of unused products. This of course led to lower profits, which inevitably had a direct effect on the stock prices.

When the market dropped, investors who were investing on margin with borrowed money had to sell their shares. This escalated the decline. This would lead to one of the longest recessionary periods in the history of the United States: The Great Depression.

This period lasted for nearly four years, and the effects lasted until the onset of World War II. How bad was this market crash? The Dow Jones Industrial Average tumbled by 11% on October 24 alone and did not find a bottom until July of 1932.

At this point, the blue-chip index was down nearly 90% from its recently set highs in September of 1929. Can you imagine if the Dow Jones Industrial Average lost 90% of its value in this day and age? It would mean companies like Apple, Microsoft, Home Depot, or JPMorgan would be completely wiped out.

October 1987: The Black Monday Crash

While the market crash of 1929 is known as Black Tuesday, the stock market crash in 1987 is widely known as Black Monday.

When we talk about market crashes being sudden and unexpected, Black Monday is the epitome of this.

On Monday, October 19, 1987 the Dow Jones Industrial Average plummeted by 22% in a single session. Black Monday remains the single largest drop for the index in its 136-year history.

So what was the cause for Black Monday’s sudden freefall? Everyone has their theory, but the most widely accepted one seems to be a malfunctioning of an early version of computerized trading.

Believe it or not, in 1987 many institutions were implementing program trading to improve efficiencies. The only problem was that these early iterations of program trading led to more buy orders placed than sell orders.

When the New York Stock Exchange opened for trading on Black Monday, the selling pressure increased by the rise in sell orders from the computerized trading systems. Of course, this led to other investors panic selling which had a chain reaction at stock markets around the world.

The stock market hit the worst was the Hong Kong Stock Exchange, which lost over 45% of its value in a single session. Other stock markets hit hard include Tokyo, Australia, and the FTSE in London.

On the bright side, because it was a technical error and not any one event, the stock market rebounded rather quickly. Still, it took the Dow Jones Industrial Average until September of 1989 to return to the levels before the Black Monday crash happened.

September 2001: The Dot-Com Bubble Burst

The dot-com bubble in September 2001 is an example of a stock market crash that happened due to the fervor of investors around tech stocks. You might be drawing comparisons to the current strength of the tech sector in today’s market.

Back in 2001, tech startups and internet companies were brand new. They were almost considered unchartered territory. Perhaps a more relatable modern-day equivalent would be electric vehicles, cryptocurrencies, or NFTs.

The NASDAQ was the index that took the brunt of the losses during the dot-com crash. The tech-heavy index surged from 1,000 to 5,000 basis points from 1995 to 2000.

This might seem cute when compared to the NASDAQ’s current levels at over 14,000 basis points. But that period still saw exponential growth and an entire index gained 500% in five years. If you think tech valuations are out of control now, you should have seen them during the dot-com bubble.

When the bubble finally burst on dot-com stocks, the fall was swift and painful. The brutal part about the dot-com crash was how prolonged the losses were. Over the next two and a half years, the NASDAQ lost 76% of its value, dropping from its peak of 5,048 basis points to 1,139 in 31 months.

Remember how Black Monday only took less than two years to recover from? The dot-com crash took the NASDAQ fifteen years to return to its previous highs. Hindsight is 20/20 and things looked bleak for the future of the tech sector. But the dot-com crash turned out to be an incredible time for investors to buy stocks at bargain-bin prices.

Companies like Amazon, Intel, and Oracle were all trading for pennies on the dollar. These stocks would provide great investment returns for long-term investors.

October 2008: The Global Financial Crisis

The 2001 dot-com crash was still fresh in our minds when the 2008 global financial crisis hit stock markets around the world. As you probably remember in 2008, the US housing market caused the stock market crash.

The precursor to this stock market crash started with the Federal Reserve lowering interest rates to stimulate the US economy following the 9/11 terrorist attack and the ongoing effects of the dot-com bubble crash. A surge in US home buying, particularly those with subprime mortgages, led to a collapse of the banking system.

The global financial crisis is most famous for the bankruptcy of the Lehman Brothers and the sale of Bear Sterns to JPMorgan. It is also known for the Wall Street Bailout bill in 2009 that allowed the US financial system to continue to operate.

The Federal Reserve and other Central Banks around the world needed to inject funding through loans to the global credit markets. In all, the 2008 global financial crisis was the worst stock market crash since Black Tuesday and the Great Depression.

It was also the source for the movie "The Big Short." The film followed Michael Burry and a group of investors who shorted the US housing market by putting over $1 billion into credit default swaps.

August 2015: China’s Stock Market Crash

So far, the stock market crashes we have seen were primarily in the United States. Well in August of 2015, the world’s second-largest economy experienced a flash crash of its own.

The Chinese stock market crash of 2015 is rarely even termed a market crash. You’ve likely heard of it as the Chinese stock market bubble or the Chinese stock market turbulence. The situation was so bad that the International Monetary Fund worried that it would cause the third global financial crisis in under two decades.

This market crash started back in June of 2015 and lasted through January of 2017. What was the reason for China’s market turbulence? In this case, much of the damage was self-inflicted. In an attempt to stimulate Chinese economic growth, the government implemented a campaign that would make the Shanghai Stock Exchange more appealing to individual investors.

Through the first five months of 2015, there were more than 30 million trading accounts created by Chinese citizens. This led to a massive influx of buying pressure based on rumor and misinformation, rather than educated investing. The Shanghai Stock Exchange became a bubble that was inevitably going to burst.

August 24, 2015 is also known as Black Monday in China, as the Shanghai Stock Exchange fell by 8.5%. Between June and July of 2015, the exchange lost over 30% of its value. 1,400 listed companies applied for a trading halt to stop their stocks from seeing further losses.

December 2017: Bitcoin’s Price Plunge

Bitcoin’s price crash of 2017 to 2018 still evokes fear, uncertainty, and doubt. Bitcoin and other cryptocurrencies are no stranger to volatility. The markets are largely unregulated by agencies like the SEC or the Federal Reserve Board.

As a globally decentralized system (at least in many cases), the cryptocurrency markets are open 24 hours per day and seven days per week. Some might say it is a miracle that more crashes don’t occur.

In the first half of December 2017, Bitcoin investors were reveling in a new all-time high price of $19,738. Things were certainly looking up for those who had taken the plunge into the crypto asset.

But if you thought stock market crashes were swift and painful, nothing can compare to the five-day flash crash of Bitcoin’s price from December 17 to December 22. In these five days, Bitcoin lost 45% of its value and dropped below $11,000.

In January, the selling pressure on cryptocurrencies intensified as rumors of the South Korean government placing a ban on crypto trading surfaced.

Bitcoin’s price fell a further 12% on January 12. Further events continued to hammer at the crypto markets as major exchange hacks to Coincheck and Binance caused more uncertainty amongst investors.

Finally, in March, major social media outlets like Twitter, Facebook, and even Google Search, place a ban on crypto-related advertisements for initial coin offerings. By November of 2018, the price of Bitcoin had fallen to $5,500, losing nearly 75% of its value since December of 2017.

February 2020: The Coronavirus Crash

Finally, we have the most recent market crash in February of 2020 at the onset of the Covid-19 pandemic in the United States. The result was one of the fastest declines into a bear market in stock market history. On February 20, global stock market prices closed lower, while oil prices fell by 1% and central banks around the world cut their overnight rates.

As the novel coronavirus spread across Asia, the Middle East, and Europe, each respective stock market began to plummet. From February 24 to February 28, the New York Stock Exchange fell by more than 10%. It was the fastest transition into a correction in the history of the US stock market.

Little did we know that things were about to get worse. In March, we saw three of the worst sessions in the history of the Dow Jones Industrial Average. Monday, March ninth, and March 16 were once again coined as Black Mondays, and Thursday, March 12 as Black Thursday. Each of these sessions saw the Dow Jones fall by well over 2,000 basis points.

Global financial leaders scrambled to inject liquidity to try and stabilize the markets and financial system. This led to the Federal Reserve bank in the US providing a series of stimulus injections into the money markets and slashing interest rates. By April of the same year, the stock market had emerged from the bear market and all three major US indices went on to set new all-time highs by the end of the year.

This brings us to the present day, where the Federal Reserve system is finally looking into raising interest rates back to pre-pandemic levels. The central bank is attempting to battle rising prices and inflation levels in the US economy, as we begin to emerge from the two-year-long global pandemic.

Conclusion: The Biggest Stock Market Crashes in History

When you put things into perspective, the market correction we saw in January of 2022 is but a small bump in the road. Even though there are measures put into place by financial institutions and the Federal Reserve system to avoid future crashes, global events like the coronavirus pandemic can hit at any time.

None of us like to see when stock prices go down, especially the stocks we own ourselves. But compared to say the Great Depression, the great crash of 1987, or the dot-com bubble, the pullback in growth stock prices can only be seen as healthy.

Make no mistake, there will be another stock market crash in our lifetime, but all we can do is protect ourselves by limiting the trading we do with borrowed money from margin accounts, taking profits, and limiting our downside.

Learn more about Markus Heitkoetter at Rockwell Trading.