Did Speculation Cause The 1930 Stock Market Crash?

After a decade of wealth and prosperity commonly referred to as the Roaring Twenties, the 1929 stock market crash and the 1930 stock market crash came as an unwelcome surprise to many investors, and ushered in the worst economic crisis in1930 Stock Market Crash history, the Great Depression.

Reaching a record high of 381.2, on September 2, 1929, the Dow Jones Industrial Average had enjoyed a seemingly endless upside, fueled by the expansion of investment trusts, public utility holding companies, and the increase in margin buying.

These events caused an increase in the purchase of public utility stocks, driving up their prices, and setting the stage for the collapse of the market. As these investment trusts, utility holding companies and public utilities were highly leveraged using preferred stock and massive amounts of debt, the sector was extremely vulnerable to bad news in the form of utility regulations.

When the bad news arrived in October of 1929, utilities saw a dramatic decline in prices, causing margin buyers to be forces to sell their positions, and the subsequent panic selling across the broad market.

Was The 1930 Stock Market Crash The Result Of Speculation?

Conventional wisdom dictates that the 1929 and 1930 stock market crash, was proof that the market had been too high, with market speculators bearing the brunt of the blame for the boom leading up to the crash.

While the market enjoyed an impressive annual growth rate of 21.8% from 1925 until the third quarter of 1929, this is not undeniable proof the the market had gone awry with speculation. The twenties had been a decade of extreme prosperity, and the stock market had been a reflection of the sentiment that the prosperity would continue into the future.

Many prominent economists were neither able to foresee nor explain the decline in the market, and there were many knowledgeable investors who were purchasing and holding stocks in the fall of 1929, poking holes in the theory that the market was driven to its highs by speculation alone.

Lessons From The 1930 Stock Market Crash

Whether the 1930 stock market crash was the result of an overpriced market, rampant speculation, or the overuse of margin buying, there are many lessons that can be applied to today’s market.

It is important to understand the relationship between optimism and pessimism in the stock market, and the market’s sensitivity to the actions and statements of economists and world leaders. If a statement is made concerning the condition of the market often enough – as was seen in 1929 with experts calling the market overpriced – investors may begin to believe in it.

The understanding that a segment of the market can affect the broader market is also crucial for successful investing, as history has shown with the collapse of the public utilities sector in 1929, technology stocks in 2000, and most recently, the collapse of the housing market and financial sector.

By adopting a long-term investment strategy, and maintaining a balanced, diversified portfolio, you can better position yourself to ride out market volatility. Keep in mind that it is inordinately difficult to predict a major market turn with any degree of accuracy, and therefore it is always better to plan for the inevitable swings in the market, rather than react to them.