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2020 Stock Market Crash: Facts, Causes, Effects

Sebencapital

Published
19/01/24
2020 Stock Market Crash: Facts, Causes, Effects

The big stock market crash of 2020 had a major impact starting on Monday, March 9, with the Dow Jones Industrial Average (DJIA) having its largest point drop in history up to that point. More record-setting point drops occurred on March 12 and March 16.

This crash included the three worst point drops ever in the U.S. It happened because people worldwide were very worried about the coronavirus spreading, oil prices falling, and the chance of a recession in 2020.

Even though the 2020 market crash was intense, it didn't last. Surprisingly, the stock market bounced back, even though many parts of the U.S. economy were still facing difficulties.

Key Takeaways

  • The stock market crash of 2020 started in February, right before the World Health Organization officially declared COVID-19 a pandemic.
  • On March 16, 2020, the Dow Jones had its biggest one-day drop in U.S. stock market history, falling nearly 3,000 points.
  • The problems that caused the 2020 crash had been getting worse for a while.Unlike some past crashes, the market bounced back fast and reached new records in late 2020 and early 2021.

The Stock Market's Fall From a Record High

Before the 2020 crash, the Dow hit a high record of 29,551.42 on Feb. 12. Just a week later, on Feb. 20, the Dow started dropping slowly. By March 9, it fell a significant 2,013.76 points to 23,851.02 (7.79%). This day, often called "Black Monday 2020," marked the worst single-day point drop for the Dow in U.S. market history.

On March 11, the Dow closed at 23,553.22, down 20.3% from the high on Feb. 12. This officially started a bear market and ended the 11-year bull market that began in March 2009.

Thursday, March 12, 2020, saw another record as the Dow fell a massive 2,352.60 points to close at 21,200.62. This was almost a 10% drop, which is nearly a correction in just one day.

On March 16, the Dow set another record, losing 2,997.10 points to close at 20,188.52. This point drop surpassed the original October 1929 Black Monday slide of 12.93% in one session.

From the peak on Feb. 12 to March 16, the DJIA lost 9,362.90 points, a 31.7% drop.

The chart below shows the 10 biggest one-day losses in DJIA history.

10 Biggest One-Day Point Losses in Dow Jones History

2020 Stock Market Crash: Facts, Causes, Effects

Source: S&P Dow Jones Indices
Chart: The Balance Get the data Add this chart to your site

How the 2020 Crash Compares to Previous Black Mondays

Before March 16, 2020, there were two other Black Mondays with more significant percentage drops. On Black Monday, October 19, 1987, the Dow fell by 22.6%.

Another Black Monday on October 28, 1929, saw a nearly 13% plunge in the average. This was part of a four-day loss in the stock market crash of 1929, which triggered the Great Depression.

Causes of the 2020 Crash

The 2020 crash happened because investors got worried about the impact of the COVID-19 coronavirus pandemic. There was a lot of uncertainty about how dangerous the virus was, and many businesses and industries had to close because states ordered shutdowns. This hurt many parts of the economy. Investors thought that people would lose their jobs, leading to lots of unemployment and less money for people to spend.

On March 11, the World Health Organization (WHO) said the disease was a pandemic. They were worried that leaders of governments weren't doing enough to stop the virus from spreading so quickly.

Note

The problems that caused the 2020 crash had been getting worse for a while.

Investors had been nervous ever since President Donald Trump started trade wars with China and other countries. By February 28, the Dow had fallen more than 14% from 29,551 on February 12 to 25,409 on February 28. It officially went into a correction, which means a drop of over 10%, when it closed at 25,766 on February 27.

Effects of the 2020 Crash

pandemic and something called an inverted yield curve. An inverted yield curve is when the short-term Treasury bill gives a higher return than the Treasury 10-year note. It happens when the near-term risk is seen as greater than in the distant future.

Normally, investors expect higher returns for longer-term investments. But when the yield curve flips, they want more return in the short term than in the long term. This kind of inverted yield curve came with the initial recession and made many investors nervous.

On March 9, 2020, investors wanted a higher return for the one-month Treasury bill than the 10-year note. This signaled to the world how concerned they were about the impact of the coronavirus.

Note

Inverted yield curves usually signal a coming recession. The curve flipped before the recessions of 2008, 2001, 1991, and 1981.

During the crash, bond yields were incredibly low. People who sold their stocks in the crash started buying bonds. The demand for bonds was so high that it pushed yields to historically low levels.

Normally, bear markets last around 22 months, but some have been as short as three months. After the 2020 recession, the stock market started booming in the summer and fall.

By November 24, 2020, the Dow Jones had gone beyond 30,000 points. The market kept going up and setting records, with both the S&P 500 and the Dow reaching their highest points on January 3 and January 4, 2022, respectively.

How It Affected Investors

When a recession happens, many people get worried and sell their stocks to avoid losing more money. But the quick gains in the stock market after the crash show that in 2020 and 2021, lots of investors kept investing instead of selling.

Recessions can be either good or bad for investors. Whether they do well during a market downturn depends on how they invest and handle their emotions. Looking at the S&P 500 and Dow Jones charts, it seems like investors kept putting money in even during the short recession and after. If they hadn't, prices wouldn't have gone up as fast, and the recession might have stuck around for a longer time.

In March 2020, the Federal Reserve dropped its target rate for federal funds to zero. This led to lower interest rates on auto, school, and home loans, making it cheaper to get a mortgage or a car loan in both 2020 and 2021. However, the gains weren't spread evenly across the economy, and the booming stock market didn't necessarily mean a complete recovery. While investors made big profits in 2020 and 2021, workers didn't do as well.

Note

Even after the recession, some parts of the economy, like hospitality and child care, still had high unemployment. Jobs in these areas were most affected by the pandemic. On the other hand, white-collar and information workers, who could often work from home, were less likely to lose their jobs.

Unemployment rose sharply at the beginning of the pandemic, from 3.5% in February to 14.7% by April 2020. While it fell sharply over the next year, it took until March 2022 for the national unemployment rate to reach 3.6%.

Actions That Reduced the Length of the 2020 Recession

After the 2020 stock market crash came a recession. But then, there was a significant recovery, although it wasn't spread out evenly.

Both under the Trump and Biden administrations, the federal government passed multiple bills to boost the economy. These bills included help for specific sectors, cash payments to taxpayers, increased unemployment insurance, and rental assistance.

These measures made investors feel more at ease, leading to more gains in the stock market. Investors were also hopeful about the development and distribution of several COVID-19 vaccines, which started during the Trump administration.

At first, only certain groups by age or health status could get the vaccine. But in March 2021, President Biden told states and territories to make all adults eligible for vaccines by May 1, 2021.

The reasons behind the 2020 stock market crash were unique, but investor confidence stayed high, thanks to a mix of federal support and progress in vaccine development.

Frequently Asked Questions (FAQs)

1. What is a stock market crash?

A stock market crash happens when a market index falls a lot in just a few days of trading. It's usually caused by something bad happening that makes a bunch of people sell their stocks all at once. Crashes often lead to what's called a bear market, which is when the overall market goes down by 20% or more.

2. What is Black Monday?

Black Monday happened on October 19, 1987. On that day, the Dow Jones Industrial Average lost more than 20% in just one day, and this triggered a drop in stock markets around the world. The decline wasn't caused by a single event. Instead, it was influenced, at least in part, by computer orders, which were pretty new at that time. It might also have been because the market was going up a lot and needed a correction. Additionally, portfolio insurance, where big investors protect their stock portfolios by making certain financial moves, could have played a role.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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