Often referred to as the Great Crash, the stock market crash in 1929 is considered to be the most destructive stock market crash in United States history, considering the duration and extent of its fallout. All western industrialized nations were affected by the subsequent Great Depression, which lasted for twelve years.
As the Great Depression did not come to an end until the United States mobilized for World War II in the winter of 1941, many investors who bought stocks at a time when the market was at its highest in the mid-1929 saw the majority of their adult life pass before returning to even in November of 1954.
It is important to understand the events that led up to the crash, as well as what happened during the following months and years, in order to fully comprehend the impact the market crash ultimately had. By studying this historical crash, you can gain a better prospective in your own investing, as well as be aware of the conditions that could lead to another market crash.
The Roaring Twenties And The Stock Market Crash In 1929
The Roaring Twenties marked a decade of wild exuberance, fueled by a stock market that looked like it couldn’t lose. As history has proven many times over, there is no such thing as a permanently high stock market and the stock market crash in 1929 began an unprecedented month long decline in the market.
The market experienced extreme volatility in the days leading up to what would ultimately be referred to as Black Thursday (Black Friday in Europe), October 24, 1929. Fluctuating between high volumes of trading and selling, and brief periods of recovery, the market reached its lowest level of the 20th century on July 8th, 1932.
The market crash occurred during a period of decline in the value of real estate, and was the catalyst for the Great Depression. When the market closed on July 8th at 41.22 it had lost a jaw dropping 89%, and was at its lowest point since the 19th century.
Fundamentals Of The Stock Market Crash In 1929
The speculative boom that took hold of the market in the late 1920s prior to the stock market crash in 1929 led to heavy investments in the stock market. Often times these investments were made with borrowed funds, and by August of 1929 more than the entire amount of circulating US currency at the time was out on loan – $8.5billion.
The higher the market rose, the more encouraged investors became, with speculation fueling further rises in stock prices creating an economic bubble. Due to buying stocks on margin, investors ran the risk of losing massive sums of money if the market were to turn downward – or even if it was unable to advance at a quick enough pace.
With the average P/E ratio of the S&P Composite stocks at 32.6 in the fall of 1929, which was clearly above historical norms, the market peaked at 381.17 and finally turned lower, triggering a wave of panic selling.
There has been much debate as to whether the stock market crash in 1929 started the Great Depression, or if it merely coincided with the bursting of the credit-inspired economic bubble. It is clear that it contributed to the decline in the economy as business became aware of the challenges of securing investments in capital markets for expansion and new projects.
Along with uncertainty in business comes uncertainty concerning employment, and reduction in consumption. While the crash itself is not the sole reason for the Great Depression, it is considered the signal to the start of the downward economic slide that wiped out billions of dollars in wealth in one day.