Graphic Anatomy of a Stock Market Crash: 1929 stock market crash, dot-com, and Great Recession

by David Haggith, The Great Recession Blog:

The 1929 stock market crash became the benchmark to which all other market crashes have been compared. The following graphs of the crash of 1929 and the Great Depression that followed, the dot-com crash, and the stock market crash during the Great Recession show several interesting similarities in the anatomy of the world’s greatest financial train wrecks. They also show some surprises that run against the way many people think of these most infamous of crashes.

Graphing the 1929 Stock Market Crash

The stock market roared through the 1920’s. Building construction, retail, and automobile sales advanced from record to record … but debt also climbed as a way to finance all of that. This crescendoed in 1929 when the stock market experienced two particularly exuberant rallies about a month apart (one in June and one in August with a plateau between).

Then retail, housing and automobile sales started to fall apart.

Sound familiar?

Keep reading….

(The pattern is similar to what I described in my recent article, “Irrational Exuberance During Trump Rally Exceeded All Records! We’re sailing into a massive stock-market crash.“)

After the Dow peaked in ’29, it traded sideways for half of September and then took a fairly steep drop in the remaining half; yet, it recovered almost half of its fall during that infamous October, before rounding off quickly and plunging to its near death on Black Tuesday.

People tend to forget or not notice that even the infamous Black Tuesday crash on October 29, 1929, dog-legged back up the next week quickly and then crashed even harder over the next two weeks. Bouncing back up to its October 29 bottom, it stabilized, at a point down about 120 points from its peak, which meant the market recovered to a point about 33% below its summit. At it’s worst point that year, it was down 44%.

“Black Tuesday” or the “Crash of 1929” was just the most infamous of the plunges that took the world into The Great Depression. People also tend not to be aware of the fact that the market first experienced a “Black Thursday” the week before the infamous plunge. So, let’s dissect the anatomy of the 1929 stock market crash in a little more detail.

The bigger picture of the 1929 stock market crash – The Great Depression

First, you can see the two particularly exuberant rallies during the summer that preceded the 1929 stock market crash a little better in this graph:

The 1929 stock market crash warned of its arrival with a foreshock in March when the Federal Reserve warned about rampant speculation (“irrational exuberance” during which people believed the bull market would last forever because the bull market had been running for nine years during which time, the Dow increased in value tenfold). The Fed’s proclamation created enough of a shock, tiny as it appears on the graphs above, that National City Bank announced it would provide $25 million in credit to arrest the slide. While that event is an almost unnoticeable blip on the graph above, it was a foreshock of problems that would develop into something enormous, and it was arrested only by bank intervention with what was serious money at the time.

A larger foreshock came in May, but the market went from that second event directly into its steepest rally — this in spite of the fact that construction was already cooling down and auto sales were tanking, and consumer had climbed a high wall of debt.

Wikipedia provides a good overall history of the crash of 1929, including the overzealous optimism and how that optimism fell apart before the big crash. People tend to think optimism continues in some monolithic form unabated until the exact day of a crash; but in 1929 people began to worry clear back in March. Those worries grew intense by September, but the many worries didn’t stop the market from climbing and didn’t stop the permabulls from making stupid proclamations like “Stock prices have reached what looks like a permanently high plateau.” When the market made its first major break in September, becoming severely unstable, many saw even that as a “healthy correction,” failing entirely to see how bad things would become in spite of the obviously shoddy economic fundamentals building up in many parts of “Main Street.”

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