The 5 Biggest One-Day Movements on the ASX: Causes and Recoveries
The Australian Securities Exchange (ASX) is a cornerstone of Australia's financial markets. Over the years, it has seen periods of rapid growth and steep declines, with some trading days being particularly historic for their volatility. In this post, we’ll explore the five biggest one-day movements on the ASX, discuss the underlying reasons behind these shifts, and examine how long it took for the market to bounce back. Understanding these events can offer valuable insights into the nature of financial markets, highlighting the importance of long-term strategies and risk management.
1. October 20, 1987 – Black Tuesday (-25%)
Black Tuesday remains the worst one-day fall in ASX history. On October 20, 1987, the market plummeted by 25%, part of a global stock market crash that affected exchanges worldwide, famously known as the "Black Monday" crash in the United States.
Causes:
Overvaluation: The crash was triggered by excessive speculation and overvaluation in markets worldwide. Leading up to 1987, stocks had risen significantly, fueled by easy credit and aggressive trading strategies.
Computerized trading: The rise of automated trading systems also contributed to the market's collapse. As sell orders began piling up, computers intensified the downward spiral by triggering more automated selling.
Global contagion: The crash began in the US on Black Monday (October 19) and quickly spread across Europe and into Asia-Pacific markets. By the time Australian investors woke up, panic had already set in globally, leading to a mass sell-off on the ASX.
Recovery: The recovery was slower than many expected. It took the ASX nearly two years to return to pre-crash levels. The crash, however, did lead to important regulatory changes aimed at preventing similar market failures in the future.
2. October 10, 2008 – Global Financial Crisis (-8.3%)
The Global Financial Crisis (GFC) shook markets across the world, and Australia was not immune. On October 10, 2008, the ASX fell by 8.3%, one of the sharpest declines seen during the crisis. The volatility was part of a broader financial meltdown sparked by the collapse of the subprime mortgage market in the US.
Causes:
Bank failures: The failure of major financial institutions, such as Lehman Brothers, created widespread fear about the health of the global banking system. Concerns over liquidity and solvency led to panic selling.
Credit crunch: As banks became reluctant to lend, businesses and individuals found it increasingly difficult to access credit, exacerbating the crisis.
Global recession fears: Investors worldwide feared that the financial crisis would trigger a deep and prolonged recession, leading to steep sell-offs across all sectors, including in Australia.
Recovery: Australia's economic fundamentals, including strong banking regulations and a resource-based economy, helped the market recover relatively quickly compared to other countries. The ASX regained much of its lost ground within 18 months, buoyed by stimulus measures and China's continued demand for commodities.
3. March 16, 2020 – COVID-19 Pandemic (-9.7%)
The COVID-19 pandemic led to unprecedented market disruptions globally, and the ASX saw its biggest one-day drop in history on March 16, 2020, when it plunged 9.7%. The uncertainty surrounding the pandemic's impact on public health, economies, and businesses caused a rapid sell-off across all major indices.
Causes:
Global lockdowns: Countries around the world implemented strict lockdowns to curb the spread of the virus. This led to an abrupt halt in economic activity, from retail to travel to manufacturing.
Oil price crash: Simultaneously, an oil price war between Saudi Arabia and Russia sent crude prices tumbling, further shaking investor confidence in global markets.
Panic selling: Investors were uncertain about how long the pandemic would last, how severe the economic impact would be, and whether businesses could survive the extended disruption. As a result, panic selling ensued.
Recovery: The market rebound was swift, supported by large-scale government and central bank stimulus packages. The ASX rebounded within six months, although the road to recovery for many industries, particularly travel and hospitality, was longer. This sharp recovery was largely driven by low interest rates, fiscal support, and the rapid development of COVID-19 vaccines.
4. September 29, 2008 – Lehman Brothers Collapse (-5%)
On September 29, 2008, the ASX experienced another sharp drop, falling 5% after Lehman Brothers declared bankruptcy in the US. The bank’s collapse sent shockwaves through global financial markets, further intensifying the already severe Global Financial Crisis.
Causes:
Bankruptcy of Lehman Brothers: Lehman Brothers was one of the largest investment banks in the world, and its collapse was a stark symbol of the severity of the crisis. The ripple effects were felt globally, with fears of widespread contagion throughout the financial system.
Global credit freeze: Banks became unwilling to lend to each other, creating a credit freeze that threatened businesses' ability to operate. Investors sold off assets to mitigate risks, leading to significant drops in equity markets.
Lack of confidence in government response: At the time, there was uncertainty about how governments and central banks would respond to the crisis, contributing to investor panic.
Recovery: The recovery was tied to broader global efforts to stabilize the financial system. The ASX began to recover in early 2009, though it would take several years for the market to fully regain confidence. By 2011, the ASX had recovered most of its losses, as the worst of the GFC subsided and global economies began to stabilize.
5. October 28, 1997 – Asian Financial Crisis (-7.6%)
The Asian Financial Crisis of 1997 caused major upheaval in markets around the world, and the ASX was no exception. On October 28, 1997, the index dropped 7.6%, marking one of the sharpest one-day declines in its history. The crisis, which began in Thailand, spread quickly throughout East Asia, sparking fears of a global recession.
Causes:
Currency devaluations: The crisis was triggered by a series of currency devaluations in Thailand, Indonesia, and South Korea. Investors feared that the economic problems in these countries could spread globally, particularly to Australia due to its trade ties with Asia.
Contagion effect: As investors pulled their money out of the region, global markets, including the ASX, saw massive sell-offs. Fears of financial contagion led to panic in many markets.
Economic slowdown: Australia’s heavy dependence on trade with Asian nations made the ASX particularly vulnerable to the economic slowdown in the region, contributing to the steep decline.
Recovery: The ASX recovered relatively quickly from the Asian Financial Crisis. The Australian economy, buoyed by strong domestic fundamentals and a resilient banking system, helped the market stabilize within a year. Moreover, the demand for Australian commodities, particularly from China, helped mitigate the effects of the crisis.
Reflections on Market Recoveries
While these major one-day drops caused significant anxiety for investors, history shows that markets tend to recover over time. The recovery periods varied depending on the nature of the crisis and the global economic conditions. Here are some lessons from these events:
Patience is key: In each of these instances, the market eventually recovered, often due to government intervention, central bank policies, or the underlying strength of the economy.
Diversification matters: Investors who were diversified across asset classes and geographies likely weathered these storms better than those heavily concentrated in a single market.
Stay informed, but avoid panic selling: Panicking in the face of sharp declines can lead to poor decision-making. Instead, it's crucial to assess the long-term impact and make informed decisions.
Regulatory improvements: Each major crash has led to changes in market regulation and investor protections, improving the market’s ability to handle future crises.
Conclusion
The ASX has faced its share of dramatic one-day falls, often triggered by global events beyond Australia's control. While these moments can cause concern, they also highlight the resilience of markets and the importance of maintaining a long-term perspective when investing. Investors who can ride out the volatility are often rewarded as markets stabilize and grow over time.
Understanding these historical crashes not only helps to manage expectations but also reinforces the value of sound investment strategies that prioritize diversification and risk management.