Crichtonomics: Stock Market Timelines

The stock market is an inherently fluid environment and subject to frequent fluctuation. There are going to be bear days and bull days no matter the circumstances. Guarantees are virtually non-existent in the world of high finance, as events like the Great Crash and the 2008 GFC have repeatedly reminded us. No bubble is too big to burst, just like no recession is too severe to recover from.

Even before 1929, with its 80% reduction in stock prices from 20’s highs, arrived to sound the death knell for the Roaring Twenties, the United States’ stock exchanges were fickle in their operation. Now, sitting atop over a century of well-preserved and thoroughly-documented market data, investors and the editorial public can look back with a fresh perspective on the history of the market as a whole.

Viewed as secular wholes, the stock market’s periods of boom and bust form recognizable eras surrounded by indicative, heavily-analyzed data. The market analysis industry’s focus on the market’s overall history has tightened in recent years as the benefits of historical analysis have been explored and commented upon by the financial community at large.

In his article The First Measured Century, PBS’s Ben Wattenberg explores the long-term causes of stock market instability and discusses the trends visible in hindsight. Heavy borrowing by investors anxious to pour money into a market they thought could only go up led to financial chaos in the investing community.

The initial market hiccups of ’29, however, led to a precipitous drop-off in investor confidence, which in turn led to disaster as banks, themselves endangered by their own heavy investment in the stock market, scrambled to call due on loans held by venture capitalists with near nothing left to their names.

The disorder experienced by the American banking system led to widespread failure and closings throughout the early 1930’s as investors, their situation fully as dire as that of the banks, raced to empty their accounts. One cannot help but consider the strong parallels to the banking crisis associated with the GFC. In the latter instance, however, Federal bailout money prevented a significant number of bank closures.

Stock market timelines like the one Wattenberg constructs help to illuminate the interconnected nature of free market capitalism, highlighting especially the feedback loop that can come into existence between investors and banks.

In a study undertaken by the Kansas City Federal Reserve researchers mapped recent market data to past trends in an attempt to isolate the warning signs of market instability and recession. Research suggests that while the market is too complex a system to map entirely, certain broad trends can be extracted by in-depth research into distinct periods of market activity. In short, prediction is impractical but a certain rough feel for trending can be acquired with enough raw data.

The stock market timeline is yet another offshoot of the ever-growing market data industry. The value of a long, unromantic look at the market’s past has been recognized by market analysts, and the use of retro-secular data in addressing the market’s primary and secondary prospects is an increasingly common occurrence as better models for prediction of market behavior emerge.

Researchers inside the fiscal community and in the academic sector have established proven methods for parsing market data on an impressive historical scale, seriously widening the field of market data research and distribution.