The Wall Street Crash of 1929

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The Wall Street Crash of 1929

A stock market crash is a sudden and sharp decline in stock prices across major sectors of the stock market, resulting in a large loss of paper wealth. The crash is caused by panic selling and underlying economic factors. It is often associated with speculation and economic bubbles.

A stock market crash is a social phenomenon in which external economic events combine with crowd psychology to create a positive feedback loop in which the selling actions of some market participants prompt many others to sell. In general, crashes occur in situations where stock prices have risen for a long time (a bull market) and there is excessive economic optimism, the market has a price-to-earnings ratio that exceeds its long-term average, and market participants are heavily leveraged and using margin debt. Other factors such as war, major cyberattacks, changes in federal laws and regulations, and natural disasters in economically productive areas can also cause the market value of many stocks to decline significantly. Despite a stock market crash, the stock prices of companies that compete with the affected companies may increase

There is no specific definition of a stock market crash, but the term is often applied to situations in which a stock market index falls by more than 10% over a period of several days. Crashes are often distinguished from bear markets (periods of declining stock prices measured over months or years) because they involve panic selling and sudden, sharp price declines. Crashes are often associated with bear markets; however, they do not necessarily occur at the same time. For example, Black Monday (1987) did not lead to a bear market. Likewise, Japan’s asset price bubble collapsed over several years without any notable incident. Stock market crashes are not uncommon.

Crashes often come as a surprise. As Niall Ferguson has said, “Before the crash, our world seemed almost static, seemingly in equilibrium, at a fixed point. So when the crash finally happened – as it inevitably did – everyone was surprised. Our brains had told us it wasn’t time for the crash yet.”

During the Roaring 20s, the economy grew for the most part. This was the golden age of technology, as innovations such as the radio, automobile, aviation, telephones, and electrical grids were developed and adopted. Companies at the forefront of these advances, including RCA and General Motors, saw their stock prices soar. Financial firms also did well, as Wall Street bankers set up mutual fund companies (then called investment funds) such as Goldman Sachs Trading. Investors were attracted to the returns from the stock market, especially the use of leverage through margin debt (i.e. borrowing money from a stockbroker to finance some of the stocks you buy and using the purchased securities as collateral).

On August 24, 1921, the Dow Jones Industrial Average (DJIA) was at 63.9. By September 3, 1929, it had more than sixfold to 381.2. It took 25 years for the index to return to that level. By the summer of 1929, the economy was clearly in a recession, and the stock market experienced a series of worrisome declines. This drop added to investors’ anxiety, with events culminating on October 24, 28, and 29 (known as Black Thursday, Black Monday, and Black Tuesday, respectively).

On Black Monday, the Dow Jones Industrial Average fell 38.33 points to 260, a drop of 12.8%. The massive sell-off overwhelmed the stock quotation systems that normally provide investors with current stock prices. Telephone and telegraph lines were jammed and unable to process them. This lack of information only led to more fear and panic. New-age technologies that had once been embraced by investors with enthusiasm were now causing them more headaches.

The next day, Black Tuesday, was a chaotic one. Overextended investors were forced to liquidate their stocks due to margin calls, flooding the exchanges with sell orders. The Dow Jones Industrial Average fell 30.57 points that day, closing at 230.07. Stock values ​​at the time plummeted. Over those two days, the Dow Jones Industrial Average fell 23%.

By the end of the week of November 11, 1929, the index was at 228, a cumulative decline of 40% from its September high. The market recovered in the following months, but it was only a temporary recovery, leading to more losses for unwary investors. The Dow Jones Industrial Average fell 89% and bottomed out in July 1932. The stock market crash came on the heels of the Great Depression, the worst economic crisis in history.