A look back at 1929
The period of October 24-29, 1929 was a defining moment in financial world history. Over the course of four trading days, the market fell 25%.
It started with an 11% loss at the open on Thursday, Oct 24 that started a panic. It was halted by the heads of the biggest US banks -- Morgan, Chase and National City and the index closed only modestly lower. The buying continued Friday and in the half-day sessions that took place on Saturday at the time.
However it all came apart as news traveled of the rescue over the weekend. On Monday, October 28 the selling and margin calls started. The index fell 13%. The next day it fell another 12% on a volume record that wouldn't be beaten for 40 years.
From there, the dip buyers stepped in. The market rallied 12% on Wednesday, Oct 30 but they were soon wiped out. A number of bear market rallies extended into April of 1920 when much of the losses were recovered. But the market would go on to lose 89% before it bottomed. The peak wasn't surpassed until November, 1954.
Those are all less-important details. What's still not understood is why the collapse happened. The conventional wisdom is that it was caused by borrowed money and sky-high valuations but that's just not the case.
As the WSJ highlights, Industrial stocks were priced at about 13 times earnings, down from 15 times in September. The best-performing stock of the year was Radio Corp of America and it peaked at 73x earnings, about the same as Amazon at the start of this week.
That's what's so scary about the crash 90 years ago. Even after 90 years of looking, there are no easy answers. There were some obvious mistakes -- interest rates were too high, protectionism was rising -- but there was something intangible and inexplicable in the mass psychology of the market.
We've seen it since in various episodes including the drop in 1987. Even the nearly 20% drop in stocks last December had all the elements of a panic.
So long as people are involved in markets, there will be fear and irrationality. What's unique about 1929 is that the drop came before one of the worst economic periods in history. What's less understood is that it wasn't really the cause or the beginning of the Great Depression. It wasn't until 1930 and 1931 when banks began to fail that the Depression hit.