Nearly every investor has heard of the Stock Market Crash of 1929. For market historians, it's important to understand the circumstances that existed in 1929. A deeper understanding of what happened in the past can possibly prevent this type of event from occurring in the future.
Following WWI, the United States experienced a broad economic expansion that was fueled by new technologies and improved production processes. Between the years 1927 and 1929, industrial production output increased 25%. Electricity was more widespread and the purchases of electrical appliances, as modern conveniences, took hold. Ford had created assembly lines that allowed cars to be produced at lower cost. The Roaring 20s were an age of rebirth for most Americans.
The stock market benefited a great deal from the expanding economy. From 1926 to 1929, the market indices moved up nearly 400%. Investors frequently talked about the great wealth that could be made in the stock market. Relaxed credit terms from banks and stock brokers fueled the buying frenzy.
So how did this roar come to a screeching halt? What exactly contributed to, or caused, the great stock market crash of 1929?
Many people blamed investors for taking speculative approaches to the market, and driving stock prices well in excess of fundamental values. But was that really true? Let's take a quick look at the three most infamous days of that era.
The stock market crashed over a period of five days. The first sign of trouble was on Black Thursday - October 24th, 1929. At that time, the volume on the stock exchange was around 4 million shares each trading day. But on Black Thursday, a record 12.9 million shares were exchanged.
The systems for tracking the market prices could not keep up with trading volume, and that may have contributed to panic selling on that day. At one point, ticker tapes were running nearly 90 minutes behind the market. By the end of the day, the market had fallen 33 points or around 9%.
Following Black Thursday, the market took back some of the loss on Friday. This led to a sense of security over the weekend, as investors felt the market could rebound. However, market conditions quickly deteriorated again on Black Monday - October 28th, 1929 - and high trading volumes once again put pressure on the flow of information.
On Black Monday, trading volumes were near 9.25 million shares, and market confidence declined sharply. By the end of the day, the market was down another 13%.
Black Tuesday - October 29th, 1929 - is the day that most historians agree dealt the final blow to the Roaring 20s, and was the starting point of the Great Depression. On Black Tuesday, a record 16.4 million shares exchanged hands. The ticker tape machines fell behind by nearly 3 hours. With all hope of a market recovery now gone, panic selling continued and the market fell another 12%.
Over the next month the market continued to decline sharply, however, the market would not bottom out until July 1932, when the Dow hit 41 from a high of 381 in 1929. Overall, the market would see a decline of nearly 90%. Even as the market started to rise in 1932, it would take another 22 years before the Dow would climb above the levels seen in 1929.
Interestingly, economists that have later examined the fundamentals from the 1920s believe there was not a stock market bubble ready to burst by 1929. In fact, most of the stock values had merely tracked the rise in expected dividend payments. The economy was expanding rapidly, and companies were enjoying this expansion. Dividends were on the rise and were expected to continue to increase in the coming years.
The stock market continued to track the economy following the crash of 1929, this time in a negative direction. Since consumer outlook was decidedly pessimistic, the economy contracted sharply. Companies were hard hit by the decrease in consumer spending, and this trend would continue for nearly three years.
Apart from the panic selling on those few days in October of 1929 that would cause sharp price declines in common stock, there was nothing unusual or "inflated" about stock prices in the days preceding or following the stock market crash of 1929. Panic selling brought the market to the ground. The simple laws of supply and demand were in place. With no one left willing to buy stocks, and everyone trying to sell at the same time, the market had nowhere to go but down.
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