Financial Trading Blog

Anniversary of Black Thursday 1929



Ninety-three years ago today, the US stock market had its most dramatic crash. With worries of recession circulating and tightening liquidity conditions, it's a topical anniversary.
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It's not just one event

The 1929 stock market crash caught many traders by surprise. But the economic situation had been getting worse for months before that. While dramatic, it wasn't the stock market crash that caused the recession and subsequent depression. Instead, October 24, 1929, was simply the date in which the reality of the economy became too apparent to the stock market to keep ignoring.


In March that year, the Fed warned that speculation was getting out of hand. A private banker came in to buy up shares and shored up the market. Through the summer, the economic situation in the US deteriorated, but the stock market kept going up. The London Stock Exchange crashed in September, and US markets declined through the month.

 

It was only the start

"Black Thursday", as it was known, opened with margin calls pulling the stock market down by 11% at the start of the day. This was the most significant one-day percentage drop in the DJIA's history up to that point. The high volume meant that it took hours for price moves to be transmitted over ticker tapes, leaving many traders in the dark about how bad the situation was. A group of bankers stepped in, buying up shares and managed to reverse the trend. The stock market closed down only 6.8% that day.
The most significant drop in the DJIA in history didn't happen until the following Monday, falling 12.8%. The day after that, it fell an additional 11.7%, despite industrialists and bankers trying to prop up the market by buying blue chip stocks. The market dropped for the next two weeks and then entered a bear market rally through the winter. It then continued downward for over two years, only reaching a bottom in 1932, three years later. While the flash crashes of October were the most dramatic, DJIA lost most in the subsequent decline. From peak to trough, 89.2%, the vast majority from 1930 onwards. Surprisingly, it took until 1954 for the DJIA to recover to its pre-crash level.
At the time, policymakers were influenced by the theory that unequal wealth distribution in the prior decade had led to the Great Depression. The idea was that wages had not kept up with productivity, and the solution was to put money in consumers; pockets, financed through higher taxes. The purpose was to redistribute purchasing power and support the economy with sizable government-funded infrastructure programs. The Great Depression didn't end until a decade later, with the start of WWII.
P/E ratio reveals overpriced stocks
In 1929, the market was trading at about 32 times its price-to-earnings ratio or P/E. Today, it's trading at about 28 times its earnings, but it has already moved beyond the 1929 record as it sold near 38 in 2021. However, it has not traded near the dot-com record of 45.
Historically speaking, when P/E ratio is trading 15 times above its earnings, stocks are overpriced, hinting at a drop towards 15. It's where it found a bottom in 2009.
anniversary-of-black-thursday-1929-24102022

 

A decline to 15 would be equal to a 45% drop in p/e, reflecting a similar fall down to 17k, which is quite impossible to achieve unless there is a depression.

 

Key takeaways

The 1929 stock market crash was not the cause of the recession and subsequent depression but rather a symptom of the deteriorating economy and unequal wealth distribution. Policymakers tried to fix it by putting money in consumers' pockets but failed, as it ended up being the Great Depression, which didn't end until WWII started. Today's stock market is overpriced, but it has been since 2009. If history repeats itself, it is due for a significant drop.

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