We at Buy Shares In like to give you the most recent stock market information. But sometimes history is worth taking a look at, too. Many of us think of the stock market crash of 1929 and the ensuing depression and wonder if history could repeat itself. In short, no. But if there were to be another stock market crash, there would be several similarities.
To determine if a crash similar to the crash of 1929 could happen today we need to first examine the root causes. It’s hard to place the blame on any one single factor. Buying stock on credit, inexperienced traders, and inflated stock prices all combined to create a volatile market that was primed for the bottom to fall out.
The Stock Market Crash: What Happened?
The 1920s, often known as the “Roaring 20s”, were a period of perceived prosperity and financial success in the United States. The rapid proliferation of industrial techniques and technology caused a sharp rise in production. With output soaring, businesses were faced with the challenge of attracting buyers in a competitive market. The answer was the rise of installment plans. “Enjoy while you pay” became a mindset of the American consumer.
Following World War I, the celebration of what was perceived as the end to global conflict increased consumer confidence. More and more individuals began investing in the stock market. Many saw the steadily rising market as a way to gain quick income. Banks and brokers exacerbated the problem by loaning individuals money to invest or by allowing them to buy additional stocks on the margins of held stock.
As stock prices continued to rise, investors saw opportunity and invested more and more, eventually leading to a situation where the value of a company’s total stock dramatically exceeded the actual value of the company. Unfortunately, the introduction of installment plans and the rapid rise in purchasing power meant that most families had, by the end of the decade, made the purchases they wanted to make. The result was a consumer economy that was saturated with goods. The boom had run its course, but investors continued to pump money into the market, inflating the bubble.
A Self-Correcting Stock Market
Governmental policies did little to stifle the ever-growing problem. Conservative presidents Warren G. Harding and Calvin Coolidge were hesitant to stand up against big business. Prosperity and strong economic times favored both presidents. Both believed that action to slow down what was seen as business growth would be seen as holding back the success of the free market and the national economy.
Inevitably the market had to correct itself. The problem with investing borrowed money was that when the market began to fall, investors had little choice but to sell their shares before the price dropped. This caused a massive selloff when the market began its largest fall on October 29, 1929. So many investors were trying to sell off their shares that the tickers of the time were unable to handle the volume. Many were reported to be delayed up to two hours, adding to the confusion and panic.
Could the crash happen again? Look at the situation which led to the crash of 1929 and compare it to today’s. The 1920’s were a time of increasing dependence upon credit, an inflated market, individual investors, and weak governmental regulation.
Could Another Stock Market Crash Happen?
A look at today’s dependence on credit gives a very similar image to that of the 1920s. Nearly every good or service can be paid for on credit. There are major credit cards, department store cards, fuel cards, etc. Add to these automobile loans, personal loans and mortgages and you begin to see a very similar image to that of the 1920s.
The largest difference between today’s investor and the investor of the 1920s is the rise of day trading. Today, the Average Joe can open their laptop and within a few clicks make whatever moves they want. While convenient, this has the potential to be catastrophic. Not all mobile investors are trained in the ups and downs of the market. In the face of what could be a short-term downward slide, there is potential for day traders to contribute to a massive sell-off.
Stock exchanges have put in place processes to help limit the amount of emotional or fear-based trading. Circuit Breakers, or pauses in trading designed to allow traders time to collect themselves are a great example. These pauses will undoubtedly have some effect on trained investors. The question is whether a break in trading will alleviate the panic in an untrained investor sitting behind a laptop. In today’s global economy, investors could simply sell their shares on a different exchange, expanding the problem.
Stock Market Education is Crucial
Educated investors know the best way to weather a downward slide in the market is to stay the course. For example, following the record loss of 777.68 points on September 29, 2008 the market bottomed out on March 6, 2009 at 6,443.27. In March of 2013 the Dow reached record levels previously set just a year before the 2008 drop.
This shows that the market is very resilient and has the potential to bounce back rather quickly in today’s world. The problem is that a large number of Americans are in or nearing retirement. These individuals have much more to lose if the market tanks and does not recover rapidly.
Finally, we have to examine the market to see if it is inflated. We are currently in the 2nd largest bull market in history. Since March 2009 the market has gained 14,591 points, or 232%. If this is indeed an inflated market, it will correct itself. The reaction of investors will determine if the downward movement in the market is merely a natural correction or a crash.
So, could another stock market crash happen today? Probably not on the same scale as the crash of 1929. Our market is very resilient, and it would be difficult to simulate the events of 1929.
But it’s extremely important that we educate ourselves about the stock market. Knowing when to sell and when to hold is only a small part of it. Investors also need to be mindful of avoiding panic. Such reactions only serve to make a falling stock market worse.