Crash Course?
On the anniversary of the 1929 stock market collapse, Laurie Laird asks if we are in danger of repeating that disaster.
What year is it? It’s October, and the autumn fashion shows have featured falling hemlines and rising waistbands — the wasp waist is back. On the economics front, the world’s biggest economy has been growing briskly for the past few years, prompting the Federal Reserve, America’s central bank, to raise interest rates repeatedly. As a result, share prices have been volatile, with markets, both in America and abroad, suffering a series of sharp, one-day falls.
In politics, the Republicans dominate Washington. And in the sporting world, a Chicago team is contesting baseball’s World Series.
No prizes for guessing 2005; that’s the easy answer. More ominously, 1929 is also correct. And on 24 October 1929, exactly 76 years ago today, the Dow Jones Industrial Index began its precipitous decline, heralding the Great Depression.
On that fateful day, still recalled as Black Thursday, America’s benchmark index ended 3.2 per cent weaker, a large fall, but not an apocalyptic one, at least by today’s standards. But the closing tally masked a massive, 9 per cent intra-day fall. The market steadied on the following Friday and Saturday, but traders returned to Wall Street the following week, pushing the Dow Jones Industrial Average (then as now composed of 30 shares, with General Motors the only stock remaining in the benchmark over the intervening 76 years) 13 per cent lower on Black Monday and 12 per cent lower on Black Tuesday.
By the end of October, the market stood 40 per cent lower than in early September. By July of 1932, the Dow stood nearly 90 per cent below its September 1929 levels and did not recover for another 22 years.
As many 1920s punters had financed their stock market investment with borrowed money, few had the collateral to meet the banks’ margin calls. To make matters worse, many banks had invested their excess profits in the stock market as well. By 1933, more than 10,000 of America’s 25,000 banks had failed, a quarter of Americans were out of work, and manufacturing output had slumped to 54 per cent of its 1929 level. It was not until 1941 — when factories were producing all out to support America’s involvement in the second world war — that the unemployment rate slipped back below 10 per cent.
America’s troubles rippled throughout the world. Britain — already suffering from a series of recessions through the 1920s — suffered a 50 per cent plunge in exports, pushing unemployment up to 20 per cent of the work force.
Of course, there are vast differences between 1929 and 2005. Now it’s the Chicago White Sox competing for the World Series title. Back in 1929, it was the Cubs who fought (and ultimately lost) the title.
Also, the government has become much more sensitive to investor sentiment. In 1929, Washington stayed out of the business of business, for the most part. When the market crashed in October of 1987, falling by 22 per cent on Black Monday, the government and the Federal Reserve were active behind the scenes, persuading big players to return to the market in order to restore investor confidence.
Most importantly, America’s central bank, just 15 years old at the start of the Great Depression, has grown into its job. Back then, the Fed was largely concerned with protecting the value of the dollar, rather than monitoring the health of the broader economy. The Fed cut rates immediately after the market plummeted in 1929, but began lifting then again by 1930, as economic growth was slowing precipitously.
In 1988, the Federal Reserve was quick to cut rates when Long Term Capital Management stood on the brink of failure, fearing that the hedge fund’s collapse could threaten America’s entire financial system. The Fed also shaved rates in 2001, after the bursting of the dotcom bubble.
The stock market has often struggled on anniversaries. The Dow actually rose by 1.25 per cent last Wednesday, the 18th anniversary of the 1987 crash, but fell sharply on the subsequent two days. British investors marked the day by pushing the FTSE 100 index 1.8 per cent lower last Wednesday; the benchmark continued lower through the week. By Friday, the fourth straight decline, the Footsie stood 2.5 per cent lower than it did a week earlier, and 6.7 per cent below the four-year high of 5,515 touched at the start of the month.
Concerns that the spike in crude oil prices is fuelling broader price rises — on both sides of the Atlantic — have spooked the market in 2005.
“People are having fears of rising inflation and central banks becoming more hawkish,” said Charles de Boissezon, a strategist at Deutsche Bank.
Last week, Federal Reserve governor Donald Kohn indicated that the American central bank would continue to tighten monetary policy. “We are not yet at a point where we can stop and watch the economy evolve for a while,” he said. That echoes similar comments from no fewer than five Fed officials over the past week. In Britain, Bank of England governor Mervyn King recently poured cold water on suggestions of a near-term rate cut, and the Bank’s Monetary Policy Committee did not even discuss easing rates at this month’s gathering.
At the same time, British growth is declining dramatically. Gross domestic product expanded by just 0.4 per cent in the third quarter, its slowest pace in 13 years, or a 1.6 per cent annual rate.
That means the stock market is due for a correction, say the analysts. “I think we’re probably going to go down a bit,” said Tony Morgan, director at broker Hoodless Brennan.
The fears that interest rates are on hold, or could even be on the rise, may be more an excuse for investors to take profits than a negative verdict on the market, insist some.
Punters are “looking for a reason to pause for breath”, de Boissezon said, particularly in the heavily weighted resource sector. BP, which comprises close to 10 per cent of the benchmark, has fallen by 11 per cent since late September
But any sharp falls in British share prices are likely to bring buyers back into the market, as the fundamentals supporting domestic stocks remain strong, the analysts insist. “Over the medium term (British shares) remain a compelling asset class,” de Boissezon said. “There is sufficient liquidity and valuations are still fine. We’re not frightened by this sort of correction.”
And it is this keenness to buy shares on dips that makes a protracted, 1929-style market collapse unlikely, said Morgan. “People are always looking for a bargain.”
In fact, on July 7, when the terrorist bombs detonated on London’s transport system, killing 52 commuters, Hoodless Brennan saw “panic buying”, Morgan said. “On July 7, we saw a surge of account opening and account activity.” The Footsie shed 71.3 points that day, a 1.36 per cent fall, recovering from a near-4 per cent drop earlier in the day. Such bargain hunting means “the tendency for a bounce up is much quicker,” said Morgan.
The return of the wasp waist and the resurgence of a Chicago baseball team — it’s like 1929 all over again. Thankfully, the bleakest event of that year, the collapse of the stock market, is unlikely to experience a revival.