Dow Plunges 800 Points—Is This the Start of a New Financial Crisis?

The headlines have been dramatic over the last couple of days, and with good reason. On May 21, 2025, the Dow Jones Industrial Average took a sharp nosedive, dropping 800 points in a single day. Investors of all experience levels started wondering if America was on the brink of another financial crisis, similar to the one that we faced in 2008.

The stock market is prone to periods of ups and downs that often rotate from one day to the next. However, a decline of this magnitude has the potential to create a number of problems. When faced with such a drastic drop, investors usually start making emotionally charged decisions, especially when they have significant retirement accounts, real estate holdings, and stock-heavy portfolios.

Before you start selling off your stocks for a fraction of the price that you paid, it’s important to understand what caused this drop and what the decline in the market might mean for you. Yes, the US economy got some bad news on May 21, but that doesn’t necessarily mean that it’s time to dust off your doomsday kit and brace for another economic downturn like the recession of 2008. In moments like this, panic isn’t helpful, but perspective is.

What Happened: Why the Dow Dropped So Sharply

While you know that the Dow dropped 800 points, you need to understand what happened to cause the problem. On the surface, it looks like the stock market just took a nosedive, but there were actually multiple things happening beneath the surface that caused it. On the day the Dow dropped 800 points (1.9%), the S&P 500 fell 1.6% and the NASDAQ dipped 1.4%. This means that something happened to spook investors across the board, prompting a large selloff.

The issue seems to lie with concerns about bond yields. If you’re not familiar with the term, a bond yield is the amount that an investor can expect to get in return from a bond investment. This figure is represented as a percentage of the bond’s initial price. Several factors go into bond yields, including the bond’s coupon rate, the time remaining until the bond reaches maturity, and market prices.

While casual investors probably didn’t know about it, the catalyst for the decline was a shockingly weak auction of 20-year Treasury bonds that sent long-term yields surging. More specifically, the 10-year Treasury yield jumped by more than 4.5%, its largest increase since February 2025. When yields increase that sharply, it creates a downward pressure on stocks, because higher yields make bonds more attractive relative to equities and raise borrowing costs for both companies and consumers.

The drastic downturn in the stock market was also driven by a report from the Congressional Budget Office (CBO). The office published a report saying that President Trump’s proposed tax plan could add up to $3.8 trillion to the national debt. That type of news does nothing to promote confidence in the market, which led to many major investors selling stock. When combined with fears about inflation lurking in the background, it was the perfect recipe for a major downturn in the market.

Are We Heading Toward a New Financial Crisis?

The word “crisis” gets thrown around a lot, especially when the stock market experiences a decline like it did on May 21. One of the most natural responses to the type of news that broke a few days ago is to compare it to the last major financial crisis that the US faced. However, there are some drastic differences between this downturn and the onset of the 2008 financial crisis.

The leading cause of the financial crisis of 2008 was the housing market. In the years leading up to 2008, lenders lowered their standards, which led to subprime lending. Interest rates were low, which made applying for a mortgage even more attractive. In some markets, homes that are currently valued at $500,000 or more were selling for a fraction of that price. When the housing bubble burst (something that was bound to happen according to experts), the mortgage market collapsed, which led to the financial crisis and subsequent recession.

The events of May 21, 2025, were a reaction to market uncertainty. That’s very different than the conditions that created the financial crisis of 08. While they both produced market downturns, the fact that the most recent decline was reactionary to a congressional report is actually good news. At this point, there aren’t any systemic failures that are pushing the market down.

However, we must remember that market events don’t happen in a vacuum. If bond yields continue climbing and concerns about the national deficit persist without any meaningful reform, there could be some rough days in the near future.

What Does This Mean for Everyday Investors?

If we’re being honest, most “average’ investors don’t follow the market as closely as those who trade stocks for a living. The average investor not only doesn’t have access to the information that major firms have, but they also don’t understand all of the intricacies of stock increases and declines. With that said, if you logged in to check your retirement account after news of the Dow dropping, you probably got a stomachache. In these moments, you must remember that long-term investing is about resilience, not reaction.

Yes, the market fell hard, and there are concerns about government spending and inflation. But those facts do not mean that you should start selling your assets off in a panic. In fact, doing so will likely do more harm than good to your portfolio.

Some of the most popular investors in the world view moments like these as opportunities instead of thinking of them as threats. A decline in the market means that stocks are essentially “on sale.” For investors who have time to wait things out, this means that quality stocks can be purchased for a fraction of their usual cost.

Downturns like the one we’re currently experiencing also point to the importance of diversifying your portfolio. For instance, if all of your money is currently tied up in real estate or tech investments, this is a great opportunity to move some money around and bring some new investments into the fold. Mixing in some bonds, dividend-earning stocks, and alternative assets can help you navigate the bumps when the market gets a little rocky.

What to Watch Next

No financial crisis is based on a single day of decline. Just like the conditions for the 2008 crash had been bubbling beneath the surface for some time, the market is not currently in crisis because of a bad day on May 21. However, it’s still a good idea to monitor some of the factors that could lead to the 800-point drop turning into a bigger problem.

It’s probably a good idea to monitor the economy’s ongoing battle with inflation. Continued increases in inflation have the potential to push the Fed to raise rates again, which can put more stress on the market. You can also monitor policy statements issued by the Fed. Any reports that rates are going to stay higher for longer periods of time will have an impact on stocks and bonds, the primary types of investments that people rely on.

If you have bonds in your portfolio, as most retirement accounts do, you can watch the 10- and 20-year yield Treasuries. If they continue to climb, you should expect more market volatility. Finally, keep an eye on corporate earnings. If high borrowing costs start to impact a company’s profits, its stock prices will probably follow suit.

Ultimately, the biggest threat to the Dow and the US stock market isn’t a single day on which it drops 800 points. While that’s not great news by any means, it’s unlikely to create a long-term financial crisis. Instead, the market is more likely to be adversely affected by a continuing trend of rising yields, booming debt, and stagnant economic growth. Those conditions could push us into a financial crisis like the one in 2008.

Stay Calm, Stay Informed

One of the biggest mistakes that people make when investing is becoming too reactionary. They see some bad news, like the news from the day the Dow dropped 800 points, and start selling off stocks, choosing to get out before things get worse. Reactionary investing is never a path to success.

While this is certainly a time to be cautious, it’s not a time to be fearful. Instead, use this as an opportunity to review your portfolio, meet with your advisor, and evaluate your long-term goals.