How Long Can a Stock Market Crash Last?
The “1929” Crash Lasted Almost 3 Years
On May 5, 2022 the Nasdaq fell nearly 5% and the S&P 500 and Dow were not far behind. As we have noted, it is highly likely that the market will fall much farther before it hits bottom. The Covid Crash lasted five and a half weeks before the Fed opened the spigots and flooded the economy and markets with money. What will this one be like? How long can a stock market crash last? It is useful to keep in mind that the 1929 stock market crash that ushered in the Great Depression lasted for nearly three years!
Crash of a Bottomless Market, 1929 to 1932
It is useful to compare the long bull market after the Financial Crisis to the 1920s. The Dow went from 63 in August of 1921 to 381 in September of 1929. Sentiment in early 1929 was similar to what we have seen today with the belief by many that stocks will simply keep going up. Economists talked about a “permanently high plateau” of stock prices. Black Monday, October 28, 1929 was when the crash started. The Dow fell by 13% in one day. On Black Tuesday a week and a day later, the Dow fell by another 12%. Half of the market’s value was gone three weeks after the crash began. The market continued to slide until mid-1932 when the Dow bottomed out at 41.22. The market only retained 11% of its pre-crash value and the crash lasted almost three years! ( Federal Reserve History)
What Determines the Duration of a Market Crash?
Since the 1929 to 1932 crash there have been 25 more bear markets, corrections or crashes. The average length has been 289 days or nine and a half months. The simple answer to the question is that the market keeps going down until the factors that are causing the crash or bear market are alleviated. In the case of the current situation the factors include supply side issues that are driving prices up, excess money poured into the economy by the Fed, and uncertainty regarding Russia’s war in Ukraine.
Supply Side Issues
The US as well as the rest of the world depend heavily on goods manufactured in China. China’s zero tolerance policy for Covid is continuing supply chain disruptions that started with the pandemic and are driving prices up. Russia and Ukraine account for significant amount of agricultural, mineral, fertilizer, and other exports. All of these exports will be reduced or cut off due to the war. We are seeing a rise of protectionism that may endure longer than the conflict in Ukraine.
In retrospect the Federal Reserve, Congress, and two Presidents poured too much liquidity into the economy and that has helped drive the highest inflation in four decades. The Fed is starting to raise rates. They probably started too late. But the tools the Fed uses may be of little use against supply side issues or the war in Ukraine. A legitimate concern is that higher interest rates will only add insult to injury for the economy and the market.
Risks of the War in Ukraine
Vladimir Putin expected a quick and decisive victory in Ukraine and was handed a decisive defeat in his attempt to take Kyiv. The cost of the war for Russia is enormous. As we have said repeatedly there is a legitimate risk that Putin will use chemical, biological, or tactical nuclear weapons in last ditch efforts to gain enough in the war to justify to the Russian people the cost in blood and treasure. Barring the use of weapons of mass destruction, the havoc visited on the world economy by sanctions on Russia and by Russia on the world may last for years. How long can a stock market crash last? Look at the broader effects of the war and you can see the potential for a crash similar to 1929 to 1932 in duration if not in terms of market devastation.