Hold, act, or hope? The risks and opportunities of stock market crashes
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Since the price slump in response to the Russian war of aggression in Ukraine in 2022, important stock market indices such as the DAX or Dow Jones have actually only seen one direction: upward. But the longer the bull market lasts, the greater the fear of a setback or a tangible stock market crash. Especially since the global political situation is anything but rosy. But is the concern about price declines actually justified? And how should investors behave now?
Stock market crash or technical correction?
Let's start with the basics and a distinction between “crash” and “correction.” A stock market crash is a sudden and drastic drop in share prices within a short period of time. A decline of around ten percent is still described as a correction, while a crash often means losses of over 20 percent in a few days or weeks. Such severe market turmoil is usually accompanied by panic selling and a correspondingly high level of market volatility, which - as history shows - can certainly last for some time.
The price losses in mid-March 2025 can therefore only be classified as setbacks for now: In one day, the US technology exchange Nasdaq lost four percent and only some individual stocks, such as Tesla, fell by double digits. At present, however, no one can predict how things will continue on the stock market in the coming weeks and months. The fear of Donald Trump's economic and tariff policy is too great. He also stirs up Statements about a possible US recession Shareholder anxiety: “We are in a transition phase because what we are planning is very big. I want to build a strong country. I can't take stock markets into account there.”
Why there is a crash in the stock market sometimes
Of course, a tangible crash on the markets would be possible right now. In principle, the triggers include economic crises such as recession or inflation, geopolitical tensions, and financial or real estate bubbles. Sudden interest rate hikes, corporate bankruptcies or unexpected political decisions can also trigger a crash. Algorithmic trading, i.e. the computer-controlled, ultra-fast processing of trades, also plays an increasing role today. This is because computer programs that buy en masse of stocks according to certain algorithms and sell them quickly again can intensify price movements, unsettle investors and thus trigger panic selling.
Crashes are as old as stock market history
The history of financial markets is full of stock market crashes for various reasons. The first relevant was the “Black Thursday” in 1929, known in Europe as “Black Friday,” which led to the global economic crisis. Back then, after years of stock market euphoria, the Dow Jones lost around 25 percent within a few days and fell by almost 90 percent from its peak by 1932. Many people lost their belongings, banks went bankrupt and it took several years for the markets to recover again.
The 1987 stock market crash known as “Black Monday”, was one of the most dramatic slumps within a day: On October 19, the Dow Jones fell by 22.6 percent and it took over a year until the original price level was reached again. It is interesting that “Black Monday” was not based on a dramatic event. It is assumed that after two years of the Dow Jones soaring high, the fear of a setback among stock brokers has triggered a wave of sales.
Die Dot-com bubble was a reaction to a euphoric, internet-driven stock market phase. It burst in 2000 and the Nasdaq Composite lost around 78 percent of its value in the following two years.
In 2008, the financial crisis began with the collapse of investment bank Lehman Brothers, which had brought complex and risky mortgage certificates onto the market and gambled away with them. More than 25,000 employees lost their jobs, and the damage from bankruptcy amounted to many billions of US dollars. But the consequences of the bankruptcy were even more serious: The financial market crisis worsened, share prices plummeted worldwide, the S&P 500 alone lost around 57 percent in value between 2007 and 2009, and trust in the markets and that of banks among themselves was shaken.
The corona crash in 2020 is also an example of a sudden market distortion. In March in particular, there were high price losses for major indices worldwide. For example, on March 12, the DAX recorded one of the biggest price losses within one day in its history, with a drop of over twelve percent. The S&P 500 also lost around 34 percent in value in just a few weeks. But thanks to massive monetary policy measures, the stock markets recovered in record time and reached new highs in the same year.
How should investors behave?
These examples show that the stock markets are always at their “top form” after a crash. This does not apply equally to all shares - for example, during the dot-com bear market, many companies had to file for bankruptcy and investors faced a total loss. But long-term investors with a broadly diversified portfolio who remained invested or bought back quality stocks countercyclically can certainly benefit from setbacks and the subsequent recoveries.
In times of a (possible) stock market crash, prudence is therefore required in particular, as panic selling often leads to unnecessary losses. Broad diversification is also recommended in order to avoid cluster risks and balance the portfolio. For example with a “mix” of stocks, funds, ETFs, gold and alternative tangible assets such as collectibles and private equity, which also offer interesting return opportunities for private investors and are largely detached from the stock markets.
