Published On: Wed, Aug 5th, 2020

Famous Stock Market Bubbles and Crashes

Stock market bubbles had occurred throughout history in various parts of the world, as the same exuberance and debt-financed markets were the main drivers. An asset bubble occurs when the price of financial assets rise above their historical norms, intrinsic value, or both. “History repeats itself” is one of the popular mantras among stock investors, which is why a brief analysis of the top four bubbles in history must be required to be able to learn from them and eventually spot similar market conditions in the future.

photo/ Gerd Altmann

# Dutch Tulip Bubble

The Dutch invented capitalism and back in the 17th century, Amsterdam was the global commercial center and the place where the first stock market came to life. As expected, the first market bubble occurred there, namely the Tulipmania or the Dutch Tulip Bubble. In the 1630s, Holland was gripped by irrational demand for tulip, leading to prices rising twentyfold between November 1636 and February 1637. The pace of the rally had been unprecedented for that time and it eventually ended up like any other bubble – the tulip price plunged 99% by May 1937. 

# Japan’s Stock Market Bubble

In the early 1980s, Japan benefited from a period of economic boom, leading to the rising of the yen by 50%, which eventually triggered a Japanese recession in 1986. To counteract the strength of the currency, both the government and the central bank used aggressive fiscal and monetary policy. Such measures fostered aggressive speculation and high-risk stock market trading,  leading to stocks tripling in value between 1985 and 1989. In 1991, the bubble burst, and what followed was a period of stagnant economic activity and deflation. 

# U.S. Dotcom Bubble

During the late 1990s, there was increased euphoria around internet-based companies. Stock market investors and traders were investing heavily in tech stocks, even though the internet was still in its early stages and the ability to create sustainable business models was very limited. That did not matter for a few years, during which the Nasdaq Composite soared from 500 to above 5,000. 

Unfortunately, the market was once again unable to sustain the gain and the index dropped by 80% between March 200 and October 2002, triggering a U.S recession. What was known as “Nifty Fifty” represented a group of tech companies holding a big share of the Nasdaq Composite, but despite their stellar stock price rise, they could hardly make any profit. 

# U.S. 2008 Housing Bubble

The U.S. 2008 Housing Bubble shown the negative consequences of financial engineering, combined with easy monetary policy. With new financial instruments like CDOs (collateralized debt obligations) or CDS (credit-default swaps), both the housing and the stock market had taken on a sharp rally. People with little or no income were all of a sudden able to take a mortgage and buy a house. Eventually, the bubble came crashing down in 2008, when the stock market crashed 50%, requiring unprecedented support from both the Federal Reserve and the government.

Author: Lee Sadawski

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