Stock prices generally decrease before and during a recession, making it an excellent time to invest. Buying as stock prices fall pays well in the long run if you continue to dollar-cost average into your 401(k), IRA, or other investing accounts.
What investments gain value during a downturn?
- A recession is defined as two consecutive quarters of negative economic growth, however there are investment strategies that can help safeguard and benefit during downturns.
- Investors prefer to liquidate riskier holdings and migrate into safer securities, such as government debt, during recessions.
- Because high-quality companies with long histories tend to weather recessions better, equity investment entails owning them.
- Fixed income products, consumer staples, and low-risk assets are all key diversifiers.
What should I buy before the financial crisis?
During a recession, you might be tempted to sell all of your investments, but experts advise against doing so. When the rest of the economy is fragile, there are usually a few sectors that continue to grow and provide investors with consistent returns.
Consider investing in the healthcare, utilities, and consumer goods sectors if you wish to protect yourself in part with equities during a recession. Regardless of the health of the economy, people will continue to spend money on medical care, household items, electricity, and food. As a result, during busts, these stocks tend to fare well (and underperform during booms).
During the Great Depression, what was the best investment?
The Dow Jones Industrial Average began a downward trend on Oct. 24, 1929, with a 12.8 percent drop on Oct. 28 and an 11.7 percent drop the next day.
The Dow had fallen 89 percent from its 1929 high by the end of the bear market in 1932, wiping out all of the Roaring Twenties gains, and the country was in the throes of the Great Depression.
The Great Crash was caused by a variety of factors, including excessive speculation, a faltering global economy, and unethical investing techniques, according to historians. Even though the world is significantly different now than it was in 1929, the Great Crash and the economic devastation that followed can teach us a lot.
always-good pieces of advice
1. Diversify your portfolio. Even though stocks plummeted in the 1929 crash, government bonds provided investors with a safe haven. Bonds wouldn’t have totally protected you from stock market losses, but they would have substantially lessened the pain.
2. Maintain a cash reserve. Your most valuable asset is yourself, and if you lose your work, you’ll need some funds to keep your family afloat.
Furthermore, having a cash reserve can assist you in finding deals in the aftermath of a market downturn. During the Great Depression, mutual fund pioneer John Templeton put $10,000 into 104 companies and acquired shares for less than a dollar each. Near the conclusion of WWII, he sold them for around $40,000 each.
3. Never bet more money than you can afford to lose. In the run-up to the crash, buying stocks on margin was typical, with as little as 10% down.
You would double your money if your stock climbed 10%. You would lose your entire investment if it plummeted 10%.
Some mutual funds put their whole assets on margin, prompting other funds to do the same.
4. Try not to become engrossed in the hysteria. Stocks had had a long run-up to the 1929 crisis, and their prices were exceedingly high in relation to earnings.
Radio Corporation of America, for example, was a highly expensive high-tech stock at the time. Increasingly, even individuals who should have known better were enticed to enter the market by rising prices.
In September 1929, Yale economist Irving Fisher stated, “Stock prices have hit what appears to be a permanently high level.”
What were the best investments in 2008?
With markets in shambles as the Coronavirus spreads, it’s worth looking back at the Global Financial Crisis of 2007-2009. This was the worst financial catastrophe most investors had ever seen.
- How could investors have secured their portfolios during the Great Recession and earlier financial crises?
What causes major bear markets and recessions?
The majority of financial crises occur when financial assets trade at inflated, often illogical, values. This can happen for a variety of reasons. Market bubbles are frequently fueled by “easy money.” Consumer price inflation is not as high as it used to be because of low interest rates and cheap borrowing. However, they do cause asset price inflation. Low interest rates and credit availability, along with market narratives, frequently result in bubbles.
Bubbles have popped in internet stocks, real estate (during the Great Recession), cryptocurrencies, and cannabis stocks over the last two decades. All of these bubbles had one thing in common: they all told a story about how big these businesses will become in the future. It doesn’t take much to start a trend with cheap money and a compelling story. The tendency is then interpreted as evidence that the narrative is right, resulting in an influx of buyers to the market. Bubbles are frequently fueled by regular investors, who are aided by the financial media.
In a nutshell, historical tendencies are extrapolated, and investors are concerned about missing out. Valuations and economic reality aren’t given any thought. One of two things happens eventually. There will be no more buyers when everyone who is likely to invest has already done so. Any negative news now will cause the trend to reverse.
On the other hand, news will eventually reveal how overvalued assets have gotten. The cannabis industry is a recent example. After recreational cannabis was legalized in Canada for a year, it became clear that the market was a fraction of what had been predicted.
What happened during the Global Financial Crisis?
Here’s a quick rundown of what happened leading up to, during, and after the Global Financial Crisis:
Between 2001 and 2006, the US housing market experienced a bubble. Low interest rates and a surge in subprime lending contributed to this. Lending methods became riskier as the bubble grew. Banks began to issue mortgage-backed securities, allowing institutions to participate in the subprime mortgage market. This insured that money could keep flowing into the market. The bubble would have broken much sooner if this hadn’t happened.
In their own trading operations, banks also increased the leverage they utilized. To meet demand, they began to develop fake goods tied to the mortgage market. Because of the scale of the bubble that was forming, several hedge funds and bank dealers were glad to offer these goods.
In 2006, property prices finally began to decline. This resulted in mortgage defaults by homeowners who relied on capital appreciation to fund their loans. Lenders foreclosed on homes and then attempted to resell them. The property market was put under even more strain as a result of this. As the number of defaults mounted, investors realized how much danger they had taken on by purchasing mortgage-backed securities. They attempted to sell the securities, but there were no takers at the time.
Mortgage-related funds began to fail in 2007. Notably, two Bear Stearns-backed funds failed, resulting in significant losses for the bank. Liquidity in the economy dried up as banks began to deleverage and restrict their exposure to the subprime market. The fallout from the banking and real estate industries expanded to the stock market in October, causing stock prices to plummet.
Early in 2008, the first economic stimulus package was passed, although it was too late for several businesses. Despite a bailout attempt by the US Treasury Secretary in March, Bear Stearns failed. To keep the entire mortgage market from collapsing, the government was compelled to take over Fannie Mae and Freddie Mac later in the year. Then Lehman Brothers went bankrupt, and Bank of America purchased Merrill Lynch, which was on the verge of going bankrupt.
Liquidity difficulties in US markets had begun to affect markets around the world by this time. The global financial system was drained of liquidity and credit availability due to a lack of liquidity in the US banking sector. This is why the credit crisis is commonly referred to as the market meltdown.
Around the world, economic stimulus programs were enacted between September 2008 and February 2009. The American Recovery and Reinvestment Act of 2009, the most recent of these, was a $787 billion economic stimulus plan adopted in February. Soon after, markets began to rebound but it took four years for stocks to recoup their losses.
What caused the GFC?
The Global Financial Crisis was brought about by a confluence of events. The reasons of the Great Recession can be divided into three categories:
Housing bubble
The Global Financial Crisis can be traced back to an increase of sub-prime lending combined with extremely low interest rates. Sub-prime loans are those granted to people who have poor credit, few assets, and may not have a stable income. Following the dotcom bubble, US interest rates peaked at roughly 7%. After that, by 2004, they had dropped to record low levels. Mortgages become more accessible for low-income people due to the low interest rate environment.
The mortgage industry has become extremely profitable and competitive. To ensure that they could obtain as much business as possible, lenders began cutting corners and even committing fraud. As a result, many people with little income and resources were forced to take out mortgages they couldn’t pay and didn’t comprehend.
The position in which government-backed mortgage markets found themselves magnified the volume and quality of mortgages. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are mortgage securitization businesses. The government backs the mortgages these businesses sell, but they still have to compete in the market like any other institution. They have to take on more hazardous mortgages sold by banks in order to maintain market dominance.
Despite the fact that interest rates began to rise in 2004, they remained historically low. More purchasers entered the real estate market as a result of low rates and easier access to financing. As a result, property values have risen. People began purchasing homes solely on the premise that the mortgage costs would be covered by capital gain. If you’re able to refinance or “You can effectively cover the mortgage with the capital gain if you “flip” a house at a higher price every few months.
As the subprime market got more competitive, lenders began issuing different types of mortgages in order to appeal to a broader range of potential house purchasers. All of these mortgages had one thing in common: they made mortgage payments more affordable for the first few months. The hitch was that in many situations, after an initial period, the repayments would climb. Lenders were unconcerned about defaults since defaulting would result in the lender becoming the owner of the property and house prices were soaring. Millions of people effectively become speculators with highly leveraged investments as a result of these loans.
People began purchasing second and third homes as a result of this strategy’s success. Many of them were bought with no-money-down mortgages. Furthermore, many of the mortgages were foreclosed on “For the first several months, the loans were “interest only” and required no repayments.
Complex financial products and leverage
The size of the Global Financial Crisis is largely due to the new financial instruments that contributed to the creation of the bubble. Bubbles usually burst when interest rates rise and there isn’t enough money to support greater prices. During the Global Financial Crisis, however, banks discovered a means to keep money pouring into the housing market, including the subprime sector.
MBSs (mortgage-backed securities) are mortgage pools that can be sold on secondary markets. MBSs have been replaced by collateralized debt obligations (CDOs), which are more complicated variants of MBSs. CDOs are divided into tranches based on their risk level. The safest tranches pay lower interest rates, whereas the riskier tranches pay higher interest rates. Rates AAA were the safest tranches, while rates BB- were the riskiest.
CDOs were repackaged throughout time to create new CDOs. The process of rating products became more obfuscated as the products became more complicated. CDOs containing exclusively high-risk mortgages were eventually rated AAA. This allowed pension funds all across the world to invest in the riskiest home loans, many of which they had no idea about.
New products were introduced as if dangerous derivatives with AAA ratings weren’t enough. Credit default swaps were introduced by banks to allow investors to insure their CDOs against default. These swaps have the same mortgage markets as CDOs. As a result, when the mortgage market started to slow, investors began betting on it via swaps. Credit default swaps were subsequently packaged into synthetic CDOs, which were new products. Rather than investing in mortgages, investors were betting on the mortgage market.
Fraud, conflicts of interest and regulatory failure
The Global Financial Crisis was facilitated by unethical behavior throughout the financial system. Fraud, conflicts of interest, and a lack of regulatory control were among the issues. To boost sales, mortgage originators frequently employed aggressive sales tactics and deception. Home buyers were urged to inflate their financial circumstances, and paperwork were frequently faked.
Rating organizations such as Standard & Poor’s and Moody’s were paid by the banks that constructed CDOs to rate the products. This created a significant conflict of interest because the rating agencies would only be compensated if the rating was favorable to the issuers. Banks were able to market exceedingly risky goods with investment grade ratings as a result of this. It also provided investors the misleading impression that the things they were purchasing were safe.
The issue was exacerbated by deregulation that occurred in the 1980s and 1990s. Bank trading operations expanded in importance and became a significant source of revenue. In addition, banks increased the amount of leverage they utilized to boost trading profits. Many banks and financial institutions realized they were too large to fail at the same moment. They understood that if things went bad, the government would bail them out.
When banks began wagering against their customers, another conflict of interest occurred. They produced items to meet client demand while also acknowledging that the products they were selling were extremely dangerous. They then began selling synthetic CDOs to clients, effectively wagering against them.
Regulators also contributed to the crisis by enabling risks to spread across the system. Although subprime lending was always understood to be dangerous, there was minimal regulation in place. The rating agencies were not regulated, allowing them to benefit from inaccurate ratings. And, with little action from regulators or central banks, banks were permitted to trade with growing amounts of leverage.
How did different asset classes perform during the Global Financial Crisis?
Because risk assets were hit so hard by the Great Recession, it’s important to understand how other asset classes fared. From the end of October 2007, when the S&P500 peaked, until the end of February 2009, when stocks began to recover, the following table shows how some of the major assets performed. The table also shows how long it took each asset class after February 2009 to recoup its October 2007 levels.
- All of the equity markets were highly connected. While emerging world stocks fared the worst, large-cap US stocks fared no better.
- The majority of alternative asset classes, such as hedge funds, gold, and commodities, outperformed traditional asset classes such as stocks and bonds.
- While some hedge funds did exceptionally well, those with negative reruns only lost about 5% of their value.
- Junk bonds, international stocks, and emerging market equities have yet to return to pre-crisis levels eleven years later. This is partly due to USD outperformance in the case of equities.
While each asset class’s performance differs from crisis to crisis, there is some continuity. The returns of 16 asset classes were examined in a Visual Capitalist article during the five major market crises, including the Great Recession. While the average losses were lower throughout all five periods, a similar pattern emerged.
Hedge funds, US treasuries, and gold were the best-performing assets. Stocks, junk bonds, and listed property investments were the lowest performers. Long-term returns must also be considered when looking at these returns. Long-term returns are higher for riskier asset groups. Long-term returns on alternative assets are lower, but they outperform during periods of market turbulence.
It’s also worth noting that individual hedge fund performance might vary significantly an index is a rough approximation of the returns of various sorts of funds. Some hedge funds that focused on subprime-related securities blew up during the GFC, while others returned more than 500 percent. Many of those who fared well in 2010 did not continue to do well after that. This emphasizes the point that hedge funds that specialize on a small number of markets may not be good long-term hedges.
How investors could have protected their portfolios during the GFC and other crises
The above returns demonstrate that, while risky assets such as stocks perform well over time, they can lose value quickly during a major event such as the Global Financial Crisis.
The only way to protect a portfolio from such disasters is to include alternative assets and bonds in the mix. The most reliable portfolio hedges are bonds, gold, and hedge funds. Because private equity, venture capital funds, and real estate are not marked to market every day, they can help to lessen volatility.
Conclusion: Learnings from the Global Financial Crisis
The Global Financial Crisis of 20072009 demonstrated the financial system’s complexity. The contagion swept across the world’s equity markets, causing even well-diversified equities portfolios to lose a significant amount of value. A portfolio with effective asset allocation can profit from long-term stock market growth while also surviving periodic downturn markets. Rebalancing asset classes also allows cash to be re-invested in risk assets when values are low and taken off the table when they are high.
Sometimes, like with black swan occurrences like the Coronavirus epidemic, there are warning indications before a catastrophe like the GFC, and sometimes there aren’t. The best way to avoid this is to diversify your portfolio at all times.
Which businesses prospered during the Great Depression?
Chrysler responded to the financial crisis by slashing costs, increasing economy, and improving passenger comfort in its vehicles. While sales of higher-priced vehicles fell, those of Chrysler’s lower-cost Plymouth brand soared. According to Automotive News, Chrysler’s market share increased from 9% in 1929 to 24% in 1933, surpassing Ford as America’s second largest automobile manufacturer.
During the Great Depression, the following Americans benefited from clever investments, lucky timing, and entrepreneurial vision.
What is the best way to invest in a 30-year Treasury?
Until they mature, Treasury bonds pay a fixed rate of interest every six months. They are available with a 20-year or 30-year term.
TreasuryDirect is where you may buy Treasury bonds from us. You can also acquire them via a bank or a broker. (In Legacy Treasury Direct, which is being phased out, we no longer sell bonds.)
Overview
The 1929 stock market crash is widely believed to have occurred between Thursday, October 24th, and Tuesday, October 29th. “Black Thursday” and “Black Tuesday” have been coined for these two dates. The Dow Jones Industrial Average set a new high of 381.2 on September 3, 1929. The market ended at 299.5 at the close of the trading day on Thursday, October 24, down 21% from its high. On this day, the market dropped 33 points, or 9%, on trading volume that was roughly three times what it had been during the first nine months of the year. There was a selling panic, according to all accounts. The stock market had dropped to 199 on November 13, 1929. Stocks had lost approximately 90% of their value by the time the crash was completed in 1932, following an unprecedentedly massive economic downturn.
The events of Black Thursday are commonly seen as the beginning of the stock market crash of 1929-1932, yet the circumstances building up to the disaster began well before that date. The causes of the 1929 stock market crash are investigated in this article. While there is no consensus on the exact causes, the article will examine some of the arguments and promote a favored set of findings. One of the key factors, it claims, was the endeavor by influential people and the media to stop market speculators. The rapid growth of investment trusts, public utility holding companies, and margin buying, all of which supported the purchase of public utility stocks and drove up their values, was a second likely cause. Using massive sums of debt and preferred stock, public utilities, utility holding corporations, and investment trusts were all heavily leveraged. These circumstances appear to have paved the way for the triggering event. This industry was particularly exposed to adverse news about utility regulation. The terrible news arrived in October 1929, and utility stocks plummeted. After the price of utilities fell, margin buyers were forced to sell, resulting in panic selling of all stocks.
The Conventional View
The crash aided in the onset of the Great Depression of the 1930s, and the depression aided in the extension of the era of low stock prices, “proving” to many that the prices were too high.
In 1929, it was customary to blame speculators for the “boom.” “The tremendous speculation on Wall Street in recent months has driven up the rate of interest to an unprecedented level,” wrote John Maynard Keynes (Moggridge, 1981, p. 2 of Vol. XX) in the New York Evening Post (25 October 1929) shortly after learning of the October 24 disaster. “There is warrant for hoping that the deflation of the exaggerated balloon of American stock values will be for the good of the world,” the Economist wrote on November 2, 1929, when stock prices had reached their year’s low point: “there is warrant for hoping that the deflation of the exaggerated balloon of American stock values will be for the good of the world.” “Exaggerated balloon of American stock values” and “extraordinary speculation on Wall Street” are significant terms in these statements. Similarly, President Herbert Hoover characterized rising stock market values in the run-up to the crash as a speculative bubble created by the Federal Reserve Board’s blunders. “An American wave of optimism, born of steady growth during the decade, was turned by the Federal Reserve Board into the stock-exchange Mississippi Bubble” (Hoover, 1952). As a result, the general consensus was that stock prices were excessively high.
Traditional explanations of the 1929 stock market crash, on the other hand, include a lot of flaws. (Even the name is ambiguous.) The market’s worst losses occurred during the next two years, rather than in October 1929.) Many experienced economists, including Keynes and Irving Fisher, believed the financial crisis was over in December 1929, and by April 1930, the Standard & Poor 500 composite index was at 25.92, up from a close of 21.45 in 1929. There are excellent reasons to believe that the stock market of 1929 was not clearly overvalued, and that it was prudent to hold most stocks in the fall of 1929 and buy equities in December (admittedly this investment strategy would have been terribly unsuccessful).
Were Stocks Obviously Overpriced in October 1929?
Common stocks surged in value by 120 percent in four years, from 1925 to the third quarter of 1929, a compound annual growth rate of 21.8 percent. While this is a significant increase in value, it is not conclusive evidence of an increase in value “orgy of conjecture.” The stock market, with its growing prices, represented this prosperity as well as the expectation that the prosperity would continue.
The fact that the stock market lost 90% of its value between 1929 and 1932 implies that the market was overvalued in 1929, at least according to one criterion (market performance). According to John Kenneth Galbraith (1961), there was a speculative orgy and the crash was foreseen: “The essence of the boom shifted in early 1928. “In earnest, the mass retreat into make-believe, so much a component of the true speculative orgy, began.” Galbraith had little trouble predicting the end of the boom in 1929 in 1961: “On January 1, 1929, it was almost certain that the boom would cease before the end of the year.”
Compare this to the fact that Irving Fisher, one of the most influential economists in the United States at the time, was heavily involved in stocks and was positive both before and after the October sell-offs; he lost all of his fortune (including his home) before equities began to recover. In England, John Maynard Keynes, arguably the world’s leading economist in the first half of the twentieth century and a recognized master of practical finance, suffered a significant setback. P. Sergeant Florence (another renowned economist) is quoted by Paul Samuelson (1979): “Keynes may have made his money and that of King’s College, but in 1929, Keynes and Dennis Robertson’s investment trust contrived to squander my wealth.”
Galbraith’s ability to ‘predict’ the market shift is not universally admired. According to Samuelson (1979), “I realized that if I had studied price profiles with their dates hidden, as I typically do, I would have been caught by the 1929 fiasco.” For many, the Great Depression of 19291933 was neither predictable nor unavoidable.
Stock price rises before to October 1929 were not primarily the result of fools or speculators. In September and October 1929, there were also educated, knowledgeable investors buying or keeping equities. Furthermore, top economists, both then and now, were unable to predict or explain the market’s drop in October 1929. As a result, the belief that stocks were clearly overpriced is a fallacy.
From 1921 to 1923, the nation’s total real income increased by 10.5 percent per year, and from 1923 to 1929, it increased by 3.4 percent per year. In actuality, the 1920s were a time of great growth and wealth. Wholesale prices fell 0.9 percent per year from 1923 to 1929, suggesting moderate, constant money supply growth during a period of solid real growth.
It’s also instructive to look at the manufacturing scenario in the United States prior to the crash. The book Stock Market Crash and After (1930) by Irving Fisher contains a wealth of information suggesting that the industrial sector saw significant development. Fisher’s optimism about the level of stock prices is well explained by the information offered. Manufacturing efficiency (output per worker) and manufacturing production, as well as the utilization of electricity, were fast increasing, according to Fisher.
The markets’ financial fundamentals were likewise robust. The price-earnings ratio for 45 industrial stocks climbed from roughly 12 to approximately 14 during 1928. Industrials had a high of over 15 in 1929, but by the end of the year, it had dropped to around 10. These price-earnings (P/E) ratios, while not low, were not out of the ordinary historically. Most market analysts today would consider values in this range to be realistic. For example, in July 2003, the P/E ratio of the S & P 500 hit a high of 33, and in May 2004, it reached a high of 23.
Stock prices rose at different rates in different industries. The equities that rose the highest were in industries where the economic fundamentals suggested there was reason to be optimistic. Airplanes, agricultural tools, chemicals, department shops, steel, utilities, telephone and telegraph, electrical equipment, oil, paper, and radio were among the items on the list. These were sensible options in terms of growth projections.
To put P/E ratios of 10 to 15 in context, consider that government bonds yielded 3.4 percent in 1929. Investment-grade industrial bonds were yielding 5.1 percent. Consider that a 5.1 percent interest rate equals a debt price-earnings ratio of 1/(0.051) = 19.6.
The Federal Reserve Bulletin recorded a production index of 87.1 in 1920 in 1930. The index fell to 67 in 1921, then gradually rose (with the exception of 1924) until reaching 125 in 1929. This equates to a 3.1 percent annual increase in production. Commodity prices actually fell during this time. For a ten-year span, the production record was excellent.
In September, factory payrolls were at an index of 111. (an all-time high). Except for September 1929, the index fell to 110 in October, beating all previous months and years. The factory employment indicators were in line with the payroll index.
The unadjusted measure of freight car loadings in September was 121, which was likewise an all-time high.
2 The loadings fell to 118 in October, second only to September’s record low.
According to J.W. Kendrick (1961), the rate of change in total factor productivity was especially high during 1919 to 1929. The manufacturing sector’s annual rate of change of 5.3 percent from 1919 to 1929 was more than double the second greatest period’s rate of 2.5 percent (1948-1953). The era 1919-1929 saw the second-largest increase in agricultural productivity, after only 1929-1937. With a yearly productivity change metric of 3.7 percent, the period 1919-1929 easily won first place for productivity improvements, convincingly topping the six other time periods investigated by Kendrick (all of the eras studied were prior to 1961). This was an exceptional economic performance, one that would ordinarily support stock market confidence.
There were 1,436 companies that announced increased dividends in the first nine months of 1929. In 1928, there were just 955 people, and in 1927, there were only 755. Dividend increases were announced by 193 companies in September 1929, compared to 135 the year before. In September and October 1929, corporate financial news was overwhelmingly optimistic.
Barrie Wigmore (1985) looked into the financial records of 135 companies in 1929. Using the high prices, the market price as a percentage of year-end book value was 420 percent, while using the low prices, it was 181 percent. However, the enterprises’ return on equity (based on year-end book value) was a whopping 16.5 percent. When utilizing high stock prices, the dividend yield was 2.96 percent, and when using low stock prices, it was 5.9 percent.
From January to October, business periodicals published article after article about the economy’s stellar success. In June 1929, two staff writers at the Magazine of Wall Street, E.K. Berger and A.M. Leinbach, wrote: “Even the most ardent optimists have been surprised by the results so far this year.”
To recapitulate, there was minimal evidence of a significant real-economy slowdown in the months leading up to October 1929. There’s a lot of evidence that stock prices in 1929 were in accordance with the underlying economics of the companies that issued the stock. Leading economists believed that common stocks were a smart investment in the fall of 1929. In comparison to corporate results in 1929, conventional financial reporting presented cause for optimism. Stock prices were buoyed by price-earnings ratios, dividend amounts and changes in dividends, and earnings and changes in earnings.
Table 1 illustrates the average of the Dow Jones Industrial Index’s highs and lows from 1922 to 1932.
The Stock Market Study, U.S. Senate, 1955, pp. 40, 49, 110, and 111; 1930-1932 Wigmore, 1985, pp. 637-639; 1930-1932 Wigmore, 1985, pp. 637-639.
Using the data in Table 1, stocks increased in value by 218.7% from 1922 to 1929. For the past seven years, this equates to an annual growth rate of 18 percent in value. Stocks lost 73 percent of their value between 1929 and 1932. (different indices measured at different time would give different measures of the increase and decrease). The price hikes were significant, but not unfathomable. The price reductions up to 1932 were commensurate with the reality that the world was in the grip of a global slump.
If we compare the September 1929 high of 386 to the year-end value of 248.5, we can see that the market lost 36 percent of its value in just four months. Most of us would not have sold early in October if we had held stock in September 1929. I would have bought following the huge break on Black Thursday, October 24, if I had money to invest. (I would have regretted it.)
Events Precipitating the Crash
Although it is possible to argue that the stock market was not overvalued, there is evidence that many others, including the Federal Reserve Board and the US Senate, believed it was. Many people believed that the market price of equity securities had climbed too much by 1929, and this belief was reinforced every day by the media and statements made by powerful government officials.
My research downplays a number of candidates who are commonly mentioned by others (see Bierman 1991, 1998, 1999, and 2001).
- The market did not fall simply because it was too high as previously stated, this is not clear.
- While the Federal Reserve’s policies are not always prudent, they cannot be clearly linked to the October stock market disasters in any significant way.
- While the Smoot-Hawley tariff loomed on the horizon in 1929, it was not mentioned in the news as a factor, and it was most likely unimportant to the October 1929 market.
- The Hatry Affair in England had no bearing on the New York Stock Exchange, and the timing did not correspond to the October stock market disasters.
- In October, business activity news was mostly positive, with little signs of impending recession.
- Despite the publicity they have gotten, fraud and other illegal or immoral behaviors were not material.
Fundamentals, not fads or fancies, are emphasized by Barsky and DeLong (1990, p. 280). “Our conclusion is that big stock market changes occur mostly as a result of serious re-evaluation of fundamentals, rather than fads or fashions.” The following reasoning is in line with their conclusion, with one key exception. The market value of one section of the market, the public utility sector, should have been determined by existing fundamentals in September 1929, yet fundamentals appear to have altered significantly in October 1929.
A Look at the Financial Press
The Washington Post shrieked on its front page on Thursday, October 3, 1929 “In a frenzy of selling, stock prices plummet.” On the 4th of October, the New York Times headlined an item on page 1 with “The Stock Market is Hit by the Year’s Worst Break.” Three factors were highlighted in the article on the front page of the New York Times:
- A significant increase in broker loans was projected (the article stated that the loans increased, but the increase was not as large as expected).
- The Chancellor of the Exchequer, Philip Snowden, branded the stock market in the United States as a “speculative orgy.”
- Margin account deterioration necessitated selling, further depressing prices.
While the financial press in 1928 and 1929 concentrated extensively and excessively on broker loans and margin account activities, on October 3, Snowden’s comment is the sole distinct important news event. The Wall Street Journal reported on Snowden’s remark that there was “a perfect orgy of speculation” on October 4 (p. 20). The New York Times also made another editorial allusion to Snowden’s American speculation orgy on October 4. “Wall Street had come to accept its reality,” it continued. Investors “behaved as if the price of assets would infinitely advance,” according to Secretary of the Treasury Mellon, according to the editorial. The editor of the New York Times apparently thought there was too much speculation and agreed with Snowden.
On the 3rd and 4th of October, the stock market fell, but practically all reported corporate news was upbeat. The main piece of bad news was Edward Snowden’s statement on the degree of speculating in the American stock market. Throughout the year, the market had been bombarded with claims that there was excessive speculation and that stock prices were excessively high. There’s a chance that the Snowden remark on October 3 was the catalyst for the rock to start rolling down the hill, but there were other developments that put the market’s level in jeopardy as well.
The Federal Reserve Bank of New York raised the rediscount rate from 5% to 6% on August 8. The Bank of England hiked its discount rate from 5.5 percent to 6.5 percent on September 26. England was losing gold due to its participation in the New York Stock Exchange and desired to reduce its holdings. In September, there was also the Hatry Case. On September 29, 1929, it was first reported. The collapse of the Hatry industrial empire, as well as an increase in investment returns available in England, resulted in a decrease in English investment (particularly broker loan financing) in the United States, contributing to market instability in early October.
Wednesday, October 16, 1929
Stock prices fell further on Wednesday, October 16. According to the Washington Post (October 17, p. 1), “Dealt Stock Market Dealt Another Crushing Blow.” Remember that while Black Thursday, October 24, is traditionally seen as the start of the stock market crash, price drops occurred on October 3, 4, and 16.
Because the Post’s news reports on October 17 and subsequent days were Associated Press (AP) releases, they were widely read across the country. According to the Associated Press (p. 1), “The Standard Statistics Co.’s index of 20 leading public utilities, calculated for the Associated Press, fell 19.7 points to 302.4, a decline from the year’s high set less than a month ago.” On October 3 and 4, the index fell 18.7 points and 4.3 points, respectively. According to The New York Times (October 17, p. 38), “During the day’s break, utility stocks took the brunt of the losses.”
Following the price reductions on October 3 and 4, the economic news was positive. The torrent of bad news about public utility regulation, on the other hand, appears to have thrown the market into a loop. “20 Utility Stocks Hit New Low Mark,” according to the Washington Post (p. 13), and “The utility shares again burst wide open, and the general list came sliding down almost half as far,” according to the Associated Press. Another related AP piece (p. 12) appeared in the Post on October 20 “Today’s selling was concentrated on utilities, which were generally down to their lowest levels since early July.”
The following positive characteristics were identified in a New York Times appraisal of the October 16 break published on Sunday, October 20 (pp. 1 and 29):
- the world’s largest short interest (this is the total dollar value of stock sold where the investors do not own the stock they sold)
If an investor was confident that the genuine economic boom (enterprise prosperity) would continue, the negative aspects were not as concerning. The New York Times neglected to assess the market impact of the news about public utility regulation.
Monday, October 21, 1929
The market fell again on Monday, October 21. The causes were revealed by The New York Times (October 22).
The same publication published a piece (p. 24) regarding Irving Fisher’s talk “Stock prices, according to Fisher, are cheap.” Fisher also defended investment trusts, claiming that they provide investors with diversification and hence lower risk. A listener reminded him that he had given a seminar in May “pointed out that “predicting the market’s human behavior is not the same as studying its economic soundness.” Fisher excelled in basic analysis but struggled with market psychology.
Wednesday, October 23, 1929
The stock market plummeted on Wednesday, October 23. “Prices of Stocks Crash in Heavy Liquidation,” according to the headlines in the New York Times (October 24, p.1). “Huge Selling Wave Creates Near-Panic as Stocks Collapse,” according to the Washington Post (p. 1). The market dropped $4 billion, or 4.6 percent, to a total market value of $87 billion. October 23 would have gone down in history as a major stock market event if the events of the next day (Black Thursday) had not occurred. But on October 24, the “Crash” of October 23 would be reduced to a “Dip.”
“There was not a single bit of news that could be regarded as pessimistic,” The New York Times remarked on October 24 (p. 38).
Thursday, October 24, 1929
On the New York Stock Exchange (NYSE), Thursday, October 24 (Black Thursday) was a record-breaking day with 12,894,650 shares traded (the previous high was 8,246,742 shares on March 26, 1929). “Treasury Officials Blame Speculation,” read the headline on the front page of the New York Times on October 25.
The New York Times (p. 41) bemoaned the fact that the cost of call money had increased by 20% in March, and that the price reduction in March was understandable. (A call loan is a loan that is repayable on the lender’s demand.) On October 24, calling money cost only 5%. A crash should not have happened. The Wall Street Journal on Friday (October 25) credited New York bankers with halting the price drop with $1 billion in assistance.
“Market Drop Fails to Alarm Officials,” according to the Washington Post (October 26, p. 1). All of the “officials” had gathered in Washington. The rest of the country appeared to be concerned. The stock market rose on October 25. On Friday, President Hoover issued a statement about the good status of business, but he also mentioned how building and construction had been harmed “by the high interest rates produced by stock speculation” (New York Times, October 26, p. 1). Snowden’s “orgy of supposition” was mentioned again in a Times editorial (p. 16).
Tuesday, October 29, 1929
The Times published a two-column piece titled “Bay State Utilities Face Investigation” on Sunday, October 27. It meant that utilities will face less favorable regulation in Massachusetts. On Monday, October 28, the stock market fell once more. A total of 9,212,800 shares were exchanged (3,000,000 in the final hour). The New York Times published a piece on the New York public utility examining committee criticizing the rate-making process on Tuesday, October 29. The 29th of October was known as “Black Tuesday.” The next day’s headline read, “Stocks Collapse in 16,410,030 Share Day” (October 30, p. 1). In the month of October, stocks lost roughly $16 billion, or 18% of their value at the start of the month. The New York Times reported that twenty-nine public utilities lost $5.1 billion in the month, by far the greatest loss of any of the sectors named. The value of all public utility equities has dropped by more than $5.1 billion.
An Interpretive Overview of Events and Issues
The statement by Snowden, the Chancellor of the Exchequer, noting the presence of a speculative orgy in America, is likely to have sparked the October 3 breach, in my opinion. An avalanche of investment trust formation and investment has pushed public utility stocks upward. To a considerable degree, the trusts acquired shares on margin with monies borrowed from “others,” rather than banks. Any market slump made these ETFs extremely vulnerable. The Federal Trade Commission, New York City, New York State, and Massachusetts were all reviewing public utility regulation, and other regulatory commissions and investors were watching. The sell-off in utility stocks from October 16 to 23 reduced prices, resulting in “margin selling” and capital withdrawal by nervous “other” money. Then, on October 24, the panic selling began.
There are three areas where more information is needed. The first is the prevailing mood of speculation, which may have given rise to the idea that very minor difficulties could precipitate a broad market fall. Second, there are investment trusts, utility holding companies, and margin buying that appear to have over-levered and overvalued one industry. Finally, there are the public utility stocks, which appear to be the most likely cause of the meltdown.
Contemporary Worries of Excessive Speculation
During 1929, governmental officials inundated the public with words of concern about the speculative orgy taking place on the New York Stock Exchange. If the media repeats something frequently enough, a sizable portion of the public may believe it. By October 29, the consensus was that the market had been overvalued due to excessive speculation. This premise is clearly accepted by Galbraith (1961), Kindleberger (1978), and Malkiel (1996). According to the Federal Reserve Bulletin of February 1929, the Federal Reserve will limit the use of “credit facilities to promote speculative credit development.”
The United States Senate passed a resolution in the spring of 1929 indicating that the Senate will support laws “required to rectify the wrongdoing and prevent unjustified and damaging speculation” (Bierman, 1991).
Trowbridge Callaway, President of the Investment Bankers Association of America, gave a speech in which he discussed “the emergence of speculation that obfuscated the country’s vision.”
From the start, Adolph Casper Miller, an outspoken member of the Federal Reserve Board, branded 1929 as “This moment of irrational optimism and drunken cupidity.”
U.S. Steel CEO Myron C. Taylor characterized “the stupidity of the speculative frenzy, which pushed stocks to heights far above any reasonable expectation of profit.”
The election of Herbert Hoover as president in March 1929 was a watershed moment in American history. Adolph Miller (see above) was a good friend and neighbor of Hoover’s, and Miller confirmed Hoover’s suspicions. Hoover was a ferocious opponent of speculation. For instance, he wrote, “I sent individual letters to the editors and publishers of major newspapers and magazines, requesting that they issue a systematic warning to the country about stock speculation and excessively high stock prices.” Hoover then put pressure on Treasury Secretary Andrew Mellon and Federal Reserve Board Governor Roy Young “to suffocate the speculative market.” He named Chapter 2 of his memoirs (1952) “Snowden’s impact may be seen in the song “We Attempt to Stop the Orgy of Speculation.”
Buying on Margin
The government had little supervision over margin buying in the 1920s. It was ruled by brokers who were only interested in their personal financial gain. Prior to October 1929, the average margin requirement was 50% of the stock price. It may be as high as 75% on certain equities. Because the brokers maintained their money conservatively, no large brokerage firms were bankrupted when the crash hit. The margins were reduced to 25% towards the end of October.
Broker loans drew a lot of attention in both England and the United States. The level and variations in the amount were routinely reported by the Financial Times. For example, according to the October 4 edition, broker loans hit a new high on October 3 as money rates fell from 7.5 percent to 6%. Money rates had gone even lower by October 9th, to below.06. As a result, investors had relatively simple access to cash prior to October 24 at the lowest rate since July 1928.
The President of the American Bankers Association was concerned about the level of credit for securities, according to the Financial Times (October 7, 19