Effects of the Stock Market Crash

by Geri Terzo

    All three major U.S. stock market crashes -- in 1929, 1987 and 2008 -- blindsided investors. For instance, in the year leading up to the crash of 1929, stocks were repeatedly reaching record high prices, and the bull market showed no signs of abating. However, in true crash fashion, stock prices abruptly declined to levels that claimed any gains, or profits, that investors had accumulated. The implications from any crash are far-reaching. They extend from the individual investor to institutions and corporations as well as to the economy.

    Dow Jones Industrial Average

    Perhaps one of the most apparent effects of a stock market crash is that profits are erased as market values, or stock prices, plummet. During crashes, the Dow Jones industrial average has set its most dismal records and investors have lost trillions of dollars.
    The worst percentage decline ever for the Dow Jones industrial average occurred in 1987, when in one session the index lost more than 22 percent. That day gained the ominous title of Black Monday.
    The two fateful days in 1929 when the Dow began a 24 percent decline are known as Black Monday and Black Tuesday. In 2008, half of the Dow's 10 worst days ever came when it lost more than 2,600 points in 19 days.

    Legislation

    The stock market crashes of 1929 and 2008 took financial professionals and politicians by surprise. U.S. policymakers blamed a lack of transparency in financial securities and trading strategies. They responded with greater regulatory oversight of the financial markets.
    The Securities Act of 1933 required that companies provide transparency about their financial health to investors when selling equity shares and that they refrain from fraud. In 2010, the Dodd-Frank Wall Street Reform law was enacted so lawmakers could participate in observing financial market risks. The rule placed greater restrictions on derivative securities and the firms that trade them.
    As a result of the 1987 market crash, stock exchanges began enforcing market circuit-breakers that temporarily halt trading when the Dow loses more than 10 percent of its value.

    Retirement

    Investors in a retirement plan, such as a 401(k) or an individual retirement account, usually have some of those savings in the stock market. In 2011, 401(k) investors had 61 percent of their savings in the equity markets, according to a 2012 Investment Company Institute report. During the 2008 stock market crash, the value of retirement benefits in 401(k) plans declined by an average of approximately 33 percent. That led some people to postpone retirement, according to a 2012 CNN article.

    Economy and Unemployment

    A recession or a depression occur when an economy shrinks instead of grows for at least two consecutive quarters, but a depression is more severe. In 1929 the U.S. economy entered the Great Depression, which was exacerbated by the stock market crash of that era. Unemployment surpassed 25 percent, the government raised taxes, and the economy would not begin to recover for 10 more years.
    The market crash of 2008 was part of the Great Recession. During this period, corporate profits were hurt, unemployment persisted above 8 percent, and for one year the economy slowed to an average growth rate of 3.3 percent.

    Photo Credits

    • Jupiterimages/liquidlibrary/Getty Images

    About the Author

    Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and others. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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