History Repeating Itself?

The 1929 Stock Market Crash

Overview

The 1929 stock market crash is conventionally said to have occurred on Thursday the 24^th and Tuesday the 29^th of October. These two dates have been dubbed “Black Thursday” and “Black Tuesday,” respectively. On September 3, 1929, the Dow Jones Industrial Average reached a record high of 381.2. At the end of the market day on Thursday, October 24, the market was at 299.5 — a 21 percent decline from the high. On this day the market fell 33 points — a drop of 9 percent — on trading that was approximately three times the normal daily volume for the first nine months of the year. By all accounts, there was a selling panic. By November 13, 1929, the market had fallen to 199. By the time the crash was completed in 1932, following an unprecedentedly large economic depression, stocks had lost nearly 90 percent of their value.

The events of Black Thursday are normally defined to be the start of the stock market crash of 1929-1932, but the series of events leading to the crash started before that date. This article examines the causes of the 1929 stock market crash. While no consensus exists about its precise causes, the article will critique some arguments and support a preferred set of conclusions.

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The financial fundamentals of the markets were also strong. During 1928, the price-earnings ratio for 45 industrial stocks increased from approximately 12 to approximately 14. It was over 15 in 1929 for industrials and then decreased to approximately 10 by the end of 1929. While not low, these price-earnings (P/E) ratios were by no means out of line historically. Values in this range would be considered reasonable by most market analysts today. For example, the P/E ratio of the S & P 500 in July 2003 reached a high of 33 and in May 2004 the high was 23.

The rise in stock prices was not uniform across all industries. The stocks that went up the most were in industries where the economic fundamentals indicated there was cause for large amounts of optimism. They included airplanes, agricultural implements, chemicals, department stores, steel, utilities, telephone and telegraph, electrical equipment, oil, paper, and radio. These were reasonable choices for expectations of growth.

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Price/Earnings Ratio

The P/E ratio is a classic measure of any security’s value, indicating how many years of profits (at the current rate) it takes to recoup an investment in the stock. The current S&P500 10-year P/E Ratio is 27.4. This is 36% above the modern-era market average of 19.6, putting the current P/E 0.9 standard deviations above the modern-era average. This suggests that the market is Fairly Valued. The below chart shows the historical trend of this ratio. For more information on this model’s methodology and our analysis, keep reading below.

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Is history repeating itself? I ask the question based on these reports on Citizen Free Press:

• Update — 11 Wall St banks pledge to deposit $30 Billion in First Republic…
• First Republic stock tanking in after hours…

$30 billion from 11 TBTF banks appears to have calmed the masses and caused a rally on Wall Street. Until the market closed. The “little people” do not know what is going on behind the closed doors of Wall Street and the government. I cannot help but wonder why the stock in First Republic tanked after the market was closed and the “little people” have no access to trade stocks.

While tomorrow will be another interesting day, we should take note of the similarities of today’s market and the stock market crashes leading up to the Great Depression.

David DeGerolamo

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