| Cora still has a few more weeks of vacation before she heads back to school. She's not getting any slack in the learning department this summer, especially since she told the relatives I was alive during the stock market crash of 1929. Until she gets her math straight, she's got a few more hours to slave over that calculator.
After Cora realized I would be 72-years-young if I had been born in 1929 (and I'm not there for a few more decades, thank you very much), we decided to find why the market "crashed" that year. If you go to any search engine in your computer and type in "Wall Street crash 1929," you'll find several informative sites on the stock market during the era preceding the Great Depression. After we looked at the chart for the decade between 1925 and 1935, Cora remarked, "Wow, mom. It looks like that mountain that Uncle Wayne went to see." She meant Mount Everest.
On September 4, 1929 the stock market hit an all-time high, following a decade of unreal prosperity in the U.S. The rapid increase in industrialization fueled growth in the economy, and technology improvements had economists believing that this boom would continue forever. Wages increased along with consumer spending, and stock prices began to rise as well - in fact, most stocks were considered to be overvalued. During the '20s, returns on the market were 14.95%, the highest returns for the century until the 1980s.
During the period of October 21 through 29, 1929, the stock market received numerous blows that left Wall St. and public confidence crippled for almost a decade. By October 29, the stock market made a final plunge to bring the Dow down a total of 39.6% from its September high. The dive that year equaled over $14 billion.
The market began to slowly make a comeback, and by the summer of 1930 the market was up 30% from the 1929 lows. This upturn was only a glimmer of hope in the investor's eye, however. Following events made October 29 look like a nervous tic. The complete breakdown came during the summer of 1932, when the Dow lost almost 89% of its value. This was more than 50% lower than the low on October 29. This drop erased almost every gain from the stock market since its birth in 1897.
Cora and I both realized this sounded similar to the events of the past year. In spring of 2000, the stock market hit an all time high. This was fueled by a number of factors, but one thing was apparent to many people: stocks - on the whole - were overvalued. Wages increased, along with consumer spending. Returns for the decade of the '90s were higher than ever since the birth of the stock market - we saw returns of 18.17%. What would make this upcoming decade any different than the decade following the crash of '29?
Several things happened during the 1920s that we will - hopefully - never see happen again. One of the strangest practices was the 10% plan. If you wanted $1,000 in a particular stock, you would pay $100 and then make monthly payments for the remainder. This appeared to be a great deal, but it didn't bode well for the future of Wall Street.
Another problem was the banking structure. During the '20s, new banks opened at the rate of almost 5 per day. There were few federal restrictions placed on start-up capital or reserve for lending. As a result, almost half of the banks were highly insolvent. Two banks per day closed almost as quickly as they opened. Banks moved to create higher profiles with dangerous speculations in the market. This proved disastrous when the market crashed. By 1932, almost 40% of all banks dissolved because folks had lost confidence in financial institutions. Withdrawals were rampant. Ask your grandparents if they ever kept their money at home, stuffed in the mattress. It wasn't uncommon at the time.
Before the crash and the run on the banks, hopes were high and public confidence was strong - so strong that people believed just about any get-rich-quick scheme. There was no precedent for the crash, so everyone was confident there was room for unlimited gain. Many people invested their whole life savings into businesses that often didn't exist. At that time, there was no Internet or other means available to research a company or its owners.
In the decade following the crash, new agencies were developed to avoid many of the problems that created this financial disaster. The Securities and Exchange Commission (SEC) was established to help regulate market practices. The Glass-Stegall Act was passed, banning any connection between commercial banks and investment banking (rules which have since been relaxed by regulators). The FDIC was also established during the 1930s to insure individual bank accounts up to $100,000
Although the SEC, the Glass-Stegall Act and the FDIC work to help protect us from fraud and speculation, there's still a chance that you might lose money in any short-term investment. If you had bought stock on September 4, 1929, your stock could be worth much more today than the purchase price. Although most people don’t hold onto their stocks for 72 years, some need to exercise a little discipline during bear markets. This past year has proven to be a sweat-test for the truly hardy as we've seen many good company stocks grovel in the dust. It's hard to hold onto a stock when you watch it plummet almost 50%.
But, the trick is to NOT SELL during dips if you still believe in the fundamentals of those companies. Remember the adage of "Buy low, sell high?" That's a good indicator to not sell during lows, if you're holding. If you're not holding, then you need to re-evaluate your portfolio and your objectives. This quarter's earnings figures are much more promising than last quarter, and public confidence is still holding strong.
This has been an excellent time to buy stocks through dollar cost averaging. Cora and I are stocking up, as we doubt very much we'll see another Great Depression. We'll never be depressed if Cora remembers that her mother will always be 30.
Until next week,
Linda Goin |
