What We've Learned from 150 Years of Stock Market Crashes
96 comments
·March 10, 2025throw0101c
ebiester
There are a fair number of us not worried about the drop in our portfolio as much as we are worried that the current decisions will decrease the world's willingness to invest in American companies and markets permanently.
What if your hypothesis is that the fundamentals have changed?
wiredfool
So far, this is a minor stock correction coupled with unprecedented political uncertainty.
In my lifetime, there have been multiple -10+% single day drops, one -22%, and a bunch of -10% months. In that time though, no one has questioned the full faith and credit of the US government.
However now -- The Supreme Court had to take a case to rule that the government had to pay contracts that had already been delivered on. The Treasury has yoinked money from NY State over ACH because DOGE disagreed with the program. Musk and DOGE are trying to break departments so hard that there's no putting them back even with a court order. He's threatening Social Security, which has always been the third rail.
The trouble is that some form of stability and law is required for the sort of financial business that powers the US. There are other ways of being rich -- patronage, extractive, but that's not an engine that drives financialization and the ability to start business, get investments, and generally get some return back out of things. You lose the stability and the trustworthiness, the goose goes away, and there are no more golden eggs.
dachris
Yes, the market reaction so far has been very tame, considering that the stock market is supposed to be forward-looking, and there's another 4 (or at least 2) years of the same behavior, policies and politics we've had for just 7 weeks.
Extrapolate that 30 times out in the future, even leaving out feedback loops and nonlinear systems.
actionfromafar
Now, if that is a good thing or a bad thing, depends on your perspective. If you want a Russia style system, it's a great thing.
nosianu
Not yet mentioned is that this is the first time the US is actively working against their allies, and it's not just the Europeans.
If - or when? - the US leaves NATO, the EU will finally have a big incentive to buy local. Right now the EU buys most of their arms from the US. Germany's 100 billion Euro special fund created at the beginning of the war in Ukraine mostly went to US purchases.
It's a Chinese article but I found it pretty good (I'm German by the way): https://english.news.cn/europe/20240913/04cbc80f51674bd7b0a2...
Here in Europe the sudden change with regards to Russia, and how they treated an ally that the US spent at least the last two decades actively building up (Ukraine military would have been quickly overrun in 2022 without all the work and support the US provided), there now is fear that when we really need it the US may do what they did with the Ukrainians.
It may not even be political, but it's no longer far-fetched to imagine that the US will demand major concessions and payback in order to resume support, ignoring any previous agreements, just because they can.
What still works in favor of the US is, at least here in Germany, our politicians. Just now, what did the new government - consisting of the two same old major parties that have ruled all the time since this country was created - concentrate on? Major fundamental changes? No! Immediately they went for useless spending for some of their clientele, and they only went for "borrowing a lot of money" instead of institutional changes. They may be concerned, but in the end they still refuse to move. Even the new trillion is again just a new special fund kind of setup instead of fundamental changes, and you can bet most of it will disappear in the major inefficiencies of our systems.
They have also always had a lot of problems creating a true alliance of European arms manufacturers, each country pushes their own interests with little regard for the rest.
However, should they finally wake up at least a little bit from their long fat slumber, many billions of reliable purchases from the US could disappear - plus the European arms makers will become much more competitive internationally too. Especially if more countries have doubts about the reliability of relying on the US for ongoing long-term support. That could be bad for the US arms industry from two fronts.
BY the way, I am much more mad at the Europeans, my own German government(s) especially, than at Trump. We did nothing for two decades, watching Russia prepare for war. To me it also makes perfect sense for the much more populous EU to deal with its own problems without having to ask a far away country. It's kind of like "regression towards the mean", no? The US only came to Europe because of some truly special events, but at least since the fall of the East Bloc there really is no reason. We were lucky because of all the momentum, it took the US a while to realize this (and some really bad wars). I consider the developments good for Europe in the end. We are forced to confront reality.
I just wish the Ukrainians would not have to pay such an enormous price for all those fuck-ups. Which includes a lot of actions to get Ukraine into NATO at some point (see https://en.wikipedia.org/wiki/Ukraine%E2%80%93NATO_relations) - and now when they really need it, and also because of all of that, the rug is pulled from under them.
With the world watching, that too may be a factor for future US arms deals.
In addition, the world and Europe especially also depend on the US when it comes to software. The OS and Office 365 are ubiquitous. For the cloud we have alternatives and one could use those, it is much much harder for a business not to use US software.
If Europe becomes more self-reliant, we may see some movement here. It would not work bottom-up, but all the EU has to do is demand things at least for the public sector, piece by piece. This could create some certainty and cash-flow to create European software, and create a wide basis on which businesses could later build upon.
For the US, leaving Europe has a few risks. What is never mentioned are all those secondary effects of their NATO support and dominance: This way the US keeps a lid on too much European independence, and goes far beyond defense. If Trump and Musk think it's a no-brainer to give that up, well, as a European I support them. If we can't do anything with such a chance it's our own fault. This could be really good for Europe.
throw0101c
> What if your hypothesis is that the fundamentals have changed?
There's been recent research on survivorship bias in market returns, especially with regards to the US:
> Using international data, we quantify the magnitude of survivorship bias in U.S. equity market performance, and find that it explains about one third of the equity risk premium in the past century. We model the subjective crash belief of an investor who infers the crash risk in the U.S.~by cross learning from other countries. The U.S. crash probability shows a persistent and widening divergence from the implied global average. We attribute the upward bias in the measured equity premium to crashes that did not occur in-sample and to positive shocks to valuations resulting from learning about the probability.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3689958
* https://www.youtube.com/watch?v=1FwgCRIS0Wg
I'm Canadian, so I have a different home market, but that is correlated to the US economy (cf. tariffs), but my portfolio (TSX:VGRO) also has non-US/CA equities.
torlok
Buy a world index that's not over-weighted on the US or spread your money around region indices. Keep dollar-cost averaging. Stop believing you'll get more than 3-4% yearly returns above inflation. My only real strategy change as a European was to move my money to European ETF providers away from Vanguard and BlackRock because at this point you never know what the US government is going to cook up next, and to weigh more on Europe and Emerging Markets.
Arete314159
What are some good European ETF providers? Do you have to be physically within Europe to use them, or can you use them as long as you have an EU passport?
xtiansimon
“…fundamentals have changed?”
I news interview today suggested the tariffs were a new “equilibrium”.
tylerflick
People about to retire shouldn’t be that exposed anyway. Target day funds exist for a reason.
throw0101c
> People about to retire shouldn’t be that exposed anyway. Target day funds exist for a reason.
Most research about safe withdrawal rates finds having 50-75% equities is necessary for retirement periods of thirty years:
* https://en.wikipedia.org/wiki/William_Bengen
* https://en.wikipedia.org/wiki/Trinity_study
* https://en.wikipedia.org/wiki/Retirement_spend-down
Of course you could have less, but then your initial withdrawal rates becomes quite low, and so you need a much large portfolio to begin with: this would mean much more saving and much less spending (i.e., enjoyment of life) during your working life.
wintermutestwin
>Target day funds exist for a reason.
Yes - to make a lot of money on the expense ratio.
I guess if you really didn't want to learn a damn thing about modern portfolio construction a taget date fund is your best bet. However, it is incredibly easy to buy 4-6 ETFs that give you the same thing at a lower cost. Yes, you have to do a little work to re-balance these funds, but that is also an advantage to this approach as you have control over the re-balancing and can do it in a way that is more tailored to your specific situation.
I highly recommend the Risk Parity Radio podcast.
mplanchard
Vanguard target retirement funds have expense rations of 0.08%
dkarl
A lot of people plan on living twenty years past retirement and leaving some behind for charities and/or younger relatives.
darth_avocado
Anecdotally, DCA is a worse strategy when you’re doing it on the way down. Market sentiment is important. Buying on the way up is more important, and so is selling on the way down. Take profits when you can, and buy back in when the sentiment improves. It’s a better strategy than investing while the market continues to drop.
didntknowyou
you can't really compare regular drops to the current drops triggered directly by trump. the current situation is unique.
ram_rar
While dollar cost averaging and index investing are solid strategies, this article overlooks an important consideration: the Realistic Rate of Return (RoR) needed for retirement planning. Yes, US markets historically recover (lately that notion seems to be challenged more often than not), but timing matters significantly.
What happens if someone's retirement coincides with a market crash? Younger investors have time on their side for recovery, but as retirement approaches, blindly following market-based strategies without carefully considering your required rate of return could be problematic. Age-appropriate risk management becomes increasingly important as your investment horizon shortens.
317070
Meet Bob.
Bob is the world’s worst market timer.
https://awealthofcommonsense.com/2014/02/worlds-worst-market...
bryanlarsen
Bob also picked the best stock market to invest in. He would have done a lot worse investing in any other stock market. It's not surprising he did well, he picked the winner.
What are the chances the US is going to have the best stock market over the next 50 years? It's possible, but doesn't seem likely.
317070
Sure, but the lesson is that the big story is what matters, way more than detailed RoR calculations. Bob made huge mistakes, but even then compounding was the stronger force and he ended up ahead.
UncleMeat
The bob scenario is educational, but isn't relevant here. The reason why bob is still fine is that the crashes all happen during the accumulation phase. What you don't want is a crash right as you retire, causing you to rapidly liquidate a much larger portion of your savings than expected.
ManuelKiessling
But do you really liquidate „rapidly“ once you retire? You basically dollar-cost-average out of your portfolio when retirement begins.
That’s not to say that timing isn’t an issue — it absolutely is. It’s just not a make-or-brake issue imho.
nine_zeros
> Age-appropriate risk management becomes increasingly important as your investment horizon shortens.
As you appear closer to retirement, make sure you invest in Bonds or other fixed income. It won't beat inflation but it will prevent you from draw-downs exactly when the market is down.
velcrovan
Call me crazy, but since the DOGE hatchet-wielding started, I've redeemed all my US bonds. I just don't have confidence that the people needed to keep TreasuryDirect running will still have their jobs if/when I need to redeem them in the future.
nine_zeros
> Call me crazy, but since the DOGE hatchet-wielding started, I've redeemed all my US bonds.
Not crazy given the incompetence in American political leadership.
BUT, if US treasuries default, your savings accounts, agency, municipal, state, international bonds, stocks - all will fail immediately.
Your literal checking account is backed by treasuries under the hood by the bank. Widespread bank runs will be likely. And even if you are at the front of the line in a run, you will not be able to withdraw $100k in actual dollar bills because banks don't have them in vaults like the old days.
timtom123
What did you have nothing but TBills, TIPS? Not quite sure what you have where you could just sell them. But, ya, bit silly as your money is still in USD. Nothing is happening to US bonds or there are bigger problems and all your investments are at risk.
horsawlarway
I think this is an under appreciated comment. Almost all of our market data is predicated on a US government that places a huge emphasis on repaying its debts.
The current government is full of people who think it's clever, rather than short-sighted, to fuck people over.
It's not a joke that our credit ratings as a nation are slipping. It's real risk that those federal bonds may stop paying out.
Bluecobra
Good point, the website looks like it's 25+ years old so who knows what is running under the hood to keep it going.
nh23423fefe
Are you going to post in the future when your panic is shown to be irrational?
sieabahlpark
[flagged]
RivieraKid
Even a high-yield savings account should beat inflation on average. Such account has an interest rate similar to the Fed rate which is set to be above the expected inflation in normal economic conditions when the Fed is neither supporting nor slowing the economy.
darth_avocado
You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s). You shouldn’t be really relying on selling assets to pay your monthly bills.
throw0101c
> You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s).
Just before and just after retirement it's considered a good idea to go bond heavy to help mitigate sequence of returns risk:
* https://www.kitces.com/blog/managing-portfolio-size-effect-w...
* https://www.schwab.com/learn/story/timing-matters-understand...
* https://www.td.com/content/dam/tdgis/document/ca/en/pdf/insi...
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xnx
> While dollar cost averaging and index investing are solid strategies
Dollar cost averaging is a psychological strategy, not a financial one.
"The costly myth of dollar-cost averaging": https://web.archive.org/web/20050910142530/http://moneycentr...
"Debunking the Myth of Dollar Cost Averaging": https://news.ycombinator.com/item?id=36271061
stvltvs
Doesn't that assume that you're sitting on a pile of cash already and deciding how to invest it? That's not the situation for working class investors who didn't inherit a lump sum or win the lottery.
The optimal strategy for most retirement savers is "invest it as you get it" which is basically dollar cost averaging except in the rare cases when a pile of cash falls in your lap.
UncleMeat
Yes. That's usually how the term is defined. You have a lump amount to invest and you invest it over a period of time.
Meaning shifts, and now the term is also being used in web forums to describe the investment strategy of "in each paycheck, invest a bit of money." This creates confusion.
exe34
surely as retirement approaches, you should be taking money out of your investments so that you can either live off those (and traditional savings interest) or investing in safer things like real estate?
losvedir
Hm, interesting article but I wish they had included global data as well. For example, stock market crashes in Japan and other countries. As I understand it, Japan still hasn't quite recovered from its crash more than 30 years ago.
bryanlarsen
The US stock market has been an outlier for the last 150 years. Predicting that the US stock market will be an outlier for the next 150 years seems unlikely. A better predictor is likely global stock market performance, which leads to a much less rosy prediction.
xvilka
Mostly because of the restrictive Plaza accord[1] and tariffs[2].
[1] https://en.m.wikipedia.org/wiki/Plaza_Accord
[2] https://edition.cnn.com/2019/05/24/business/us-china-trade-w...
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actionfromafar
Tariffs... sounds familiar.
wiredfool
I made sure I had Smoot Hawley on my bingo card for this year.
Analemma_
> Though they varied in length and severity, the market always recovered and went on to new highs.
Not in Japan it didn't. If you bought a Nikkei 225 index in December 1989, your returns are negative to this day (apart from a very brief breakeven in 2024): that's 35 years and counting of the market not recovering and going on to new highs. And Japan's experience is probably going to become the norm rather than the exception, now that everwhere else is catching up to it demographically.
"The market always goes up in the long run" was an adage for a world of steady population and productivity growth, which is not the world we have now.
throw0101c
> Not in Japan it didn't.
Only if you were 100% JP equities without any diversification: if you had some (20%?) bonds (and rebalanced), or had an international equities (and rebalanced), you were probably fine.
* https://www.bogleheads.org/blog/2017/02/06/a-short-study-of-...
* https://www.gocurrycracker.com/lessons-from-japans-lost-deca...
> Using Portfolio Charts withdrawal rates calculator, which uses data going back to 1970, a Japanese investor (experiencing Japanese inflation and spending Yen) with a 60% allocation to Japanese stock and 40% allocation to intermediate-term Treasuries had a 30 safe withdrawal rate of 3.2%.
* https://www.bogleheads.org/forum/viewtopic.php?t=306752
Even the (S&P 500) had ten years of zero returns, and the only thing that would given a US domestic investor positive results was a bond component (and rebalancing):
* https://www.forbes.com/sites/advisor/2010/09/13/its-not-real...
Analemma_
Real interest rates in Japan were zero or negative for pretty much all of that same 35-year period, so bonds wouldn't have helped you either. And "you were up if you bought international equities" kind of proves my point: if Japan is the harbinger for the rest of the world, there will be no more "always up" markets to flee to.
throw0101c
> Real interest rates in Japan were zero or negative for pretty much all of that same 35-year period, so bonds wouldn't have helped you either.
The main thing that bonds would have helped with was in the 1980s: by regularly rebalancing to (say) 80/20 you would have taken profits off the table regularly. Further taking that (e.g.) 80% equities and putting and putting some in ex-JP/in-US would have further helped.
Even for US investors the data/research suggests some international exposure leads to better results:
* https://www.youtube.com/watch?v=1FXuMs6YRCY
Further, it looks like even in the US it hasn't been "the US market" that has done well, but rather tech specifically:
> Looking at this data, there are two distinct periods of extended U.S. outperformance—the late 1990s and today. And what do these two periods have in common? The rise of U.S. technology stocks. Bespoke Investment Group recently created this chart illustrating this phenomenon:
> Now that the U.S. technology sector makes up over 30% of the S&P 500 (as it did back in 2000), this begs the question: Is U.S. outperformance just a technological fad?
* https://ofdollarsanddata.com/do-you-need-to-own-internationa...
So, slightly contra Buffett, you're not entirely "betting on the US" but rather "betting on US tech".
skippyboxedhero
One of the mistakes that people make is not understanding that people tend towards solutions that are sold as "counter-intuitive" or "smart" because they are largely unable to independent decisions. And financial markets will respond and move in the direction of maximum pain (governments can pump trillions into the market to support them but, eventually, as has happened in Europe and now the US...they run out of taxpayer's money because this destroys productivity). Easy decisions don't exist.
ETFs are a better technology (marginally, they don't solve the issues of open-end funds) but they are primarily a psychological product, not a financial one.
fransje26
> if Japan is the harbinger for the rest of the world, there will be no more "always up" markets to flee to.
There is a Dutch saying that says:
Trees do not grow to heaven
sfblah
For years I've been reading commentators tell me that QE completely and permanently changed the nature of valuations in US markets. Now, perhaps, we'll finally get to see whether that's actually true or not.
If they're right, no sweat. If they're wrong, a recession will trigger a substantial downward revaluation of assets. For a picture of what that might look like, I suggest reading John Hussman's market commentaries, available free online.
rawgabbit
If we look at the article's worst five crashes:
1. 1929 Crash & Great Depression
2. Lost Decade (Dot-Com Bust & Global Financial Crisis)
3. Inflation, Vietnam, & Watergate
4. WWI & Influenza
5. Great Depression & WWII
#3 was a combination of the Arab Oil shocks and the Vietnam War dragging down the economy.
#2 is still a mystery to me. I don't understand how a speculative bubble was allowed to develop including the mortgage backed securities nonsense could trigger a decade long recession. I assume it was due to the repeal of https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...?
DebtDeflation
SP500 is down like 8% from the ATH, which BTW was less than 3 weeks ago. People need a little perspective. I lived through the GFC and the Dotcom bust, this is nothing (so far).
skippyboxedhero
Neither of those events were anything either.
Stock markets go to zero. Capitalism is disruptive and politically unpopular (the US pumps technology into the rest of the world and the US is still the exception, other countries know it works...they just don't care). Even in the US, which is the best case, you have had decades of underperformance. A 50% dip that fixes itself quickly is nothing, the US is the best case of the best case.
Btw, the original article also misses everything relevant about humans operate. During Covid, one of the FT economics columnists, a person who still makes a very healthy living from giving advice about human behaviour said that he sold his stocks, the volatility was too much, there were problems in his personal life, etc. Wiped out decades of gains in an afternoon (and was happy about it). Herding is going to, eventually, result in an almighty fallout. Risk-adjusted return from equities was already low...and this was before all barriers to entry were removed.
DebtDeflation
It's a fair point. And even short of "going to zero" the Nikkei didn't recover its 1989 high until last year. 35 years is a long time to get back to breakeven.
skippyboxedhero
And most world indexes that sell funds based on historical returns do not factor in those going to zero events (for example, Austro-Hungary had one of the biggest stock markets in the world...until it didn't).
And capital freedom is itself extremely contingent historically. The reason why, for example, returns in the 40/50s were high in the US was because you couldn't take your money out of the country and the government told everyone to buy govt securities to pay for the war.
And what if you need to retire during those 35 years...these studies always look at infinite time periods, the human life is not infinite.
Issues on issues. Your financial knowledge has to only limited to the US after 1981 to not understand any of these points...but lots of people are making a ton of money selling this stuff.
aeblyve
https://www.federalreserve.gov/econres/feds/files/2023041pap...
This exploratory federal reserve article argues that much of the recent (i.e. 1989-2019) gains were categorically the result of corporate tax cuts. Perhaps one way of examining the new DOGE initiative.
lysace
From a ROTW perspective (I think we tend to own US tech stocks): The USD is also crashing. Double whammy.
dgellow
The USD-EUR decline of the past week has been brutal, for sure :(
mholt
Tangential question, as I am not an economist and don't pretend to understand any of this: what would happen if the stock market didn't recover? (Surely, it could happen? Past performance is no guarantee of future results.)
The economy would effectively collapse, and I imagine our currency would be mostly worthless. People would withdraw what they could from bank accounts, which wouldn't be able to produce all the funds, so FDIC insurance would kick in, effectively printing money, but the economy has collapsed anyway?
^ That's just my intuitive speculation. I can't really grasp the scenario of stocks never recovering. Anyone with some education/background have a good explanation? (Not sure I want to trust AI with this question.)
rawgabbit
I doubt the economy will collapse but you will see massive layoffs.
Many of the wealthiest people of the US officially have zero income and pay zero taxes. They learned they want to be paid in stocks and stock options. When they need cash, they found it was easy to get loans using their stocks as collateral. In other words, if the stock market permanently tanks, it will affect the top 0.1% and prevent them from doing their current tax avoidance scheme.
For most people, they will probably get laid off, as corporations' seemingly only answer to a falling stock price is to reduce get head count. In Japan's case with their stock market in the toilet for the past thirty years, it led to a bi-furcated economy. The lucky with regular jobs with full benefits; the unlucky with gig jobs with no benefits.
tim333
Stocks represent ownership of companies and assets so at some point they become a bargain as you are buying assets and profit income cheap. For dividend investors permanently low prices would be good. They are quite expensive at the moment though.
bell-cot
Subtitle:
> Though they varied in length and severity, the market always recovered and went on to new highs.
True. But that only works if the nation itself recovers and goes on to new highs.
cjonas
Ya I think the past it felt as if the US was sharing in a global recession. This time it feels self inflicted and US Hegemony may be a thing of the past. If the dollar is no longer the world's reserve currency, I'm not sure how easily we'll be able to recover...
lucianbr
I really don't understand the subtitle, and the argument implied, which countless people make. Do they really believe new things can't happen?
"This thing has lasted for X years so it can't fail now". Wha...? I mean, maybe it will not fail, but not for the reason that it has lasted this much. Everything has an end, and things not observed before do happen.
If anything, what we can learn from the last... any period really, is that something unexpected will happen.
etchalon
It's also only true until it isn't.
MilnerRoute
Wait a minute... The S&P 500 just started spiking back up about 20 minutes ago. It's still down 2.46% for the day -- but that's a much smaller number than the drops reported this morning.
Maybe the real question is: What have we learned from the last 150 minutes?
A popular post that is often given to folks who are freaking out about drops in their portfolio:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
And for those who want to sit on the sidelines, that's usually not a good idea:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
The main folks that do have to worry about their portfolio are those who are about to retire, and those that have just retired, but there are strategies for that (against sequence of return risk):
* https://www.kitces.com/blog/managing-portfolio-size-effect-w...