By David Haggith:
What are the similarities and differences of major stock market crashes?
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.
(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%.
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.”
The Black Tuesday event actually took an entire month with that Tuesday simply being the worst of many bad days. After that horrible October, you can see in the graph above that the market slowly recovered almost half of its losses over the course of about half a year. Many thought the worst was over, but the worst was yet to come. From there, the market began a long jaunt downhill into the belly of the Great Depression, which ultimately graphed out to looked like this:
As you see, MUCH worse was yet to come. The Great Depression looks more like a run of steep rapids, and its biggest drop on a percentage basis did not happen until 1932! (See logarithmic chart below. The value of looking on a percentage basis (logarithmic) is that a 100-point drop in the market means you lose half of your money if the market was only at a total of 200 points; but when the market is at 20,000 points, a 100-point drop is only a loss of half of one percent of your money. So, the percentage of the market lost in each drop can be more important than the actual number of points lost. On the other hand, it’s also easier to experience large percentage changes when you are working with something small than with something extremely large. That’s true in all endeavors, so looking at things logarithmically is not always the best way.)
The belly of the Great Depression saw a stock market that had finally fallen by twice as much as the initial crash. The bear market lasted three years, and the market didn’t recover to its previous peak until twenty-five years later!
The market didn’t fall, go flat and then fall again. Every time it crashed, it bounced way back up and then fell harder — two steps down, one step up; two steps down, etc. (For regular readers, when I have talked in the past about the coming “Epocalypse,” I’ve been talking about the full run of waterfalls and rapids all the way to whatever the final bottom will be, not the first crash; and I’ve been talking about the entire global economy, not just the New York Stock Exchange, which isn’t even the entire US economy.)
When you look at the Great Depression, you can see that the greatest stock market crashes cannot be assessed by their first drop over the edge. These crashes are far greater beasts that are the sum of many falls. The enormity of any major crash cannot be appreciated until years after it began. To see how that is so, let’s compare the 1929 stock market crash to the more recent major collapses that more people are personally familiar with, particularly the Great Recession (being closest in global impact to the Great Depression), but first the dot-com crash.
The dot-com crash
It was in the lead-up to the dot-com crash that Alan Greenspan coined the term “irrational exuberance” in speaking of his concern that the market may have been overheating. Greenspan called it that because the market turned into a feeding frenzy where everyone wanted in because it looked as if the bull market could never end. Anyone should be able to see that such thinking is completely irrational, but somehow the majority of people actually don’t. In fact, Greenspan coined the term in December of ’96, long before the greatest level of euphoric bidding was seen. Even when he coined that phrase, he had no idea how overheated the market would actually become as it continued to climb into the sun and then melt like Icarus.
Just as one can see in the graph of the 1929 stock market crash, at no point during the period graphed prior to the dot-com crash did the market ramp up as steeply for as long as it did just before the crash. In fact, just as in 1929, the market rally showed two particularly steep bursts of euphoria with a brief plateau between them. Just as in ’29, it was as though the market sprinted as fast and as high as it could, stopped to catch its breath, and then made one final leap upward toward its summit.
You can also see clearly in graphs of both stock market crashes that the big plunge that became most identified with that particular crash did not happen right after the irrationally exuberant rally. In the case of the 1929 stock market crash, the big plunge came a month-and-a-half after the market’s peak. In the case of the dot-com crash, it came more than a year-and-a-half after the market summited. There was plenty of warning that the bull market was falling apart, but the majority would not see it.
Also, just as in the 1929 stock market crash, the biggest plunge of the dot-com bust happened in the fall. In fact, three of the biggest drops during this three-year breakdown happened in September or October (with two of them being in October, as was the case in the 1929 stock market crash). It seems the market loves a good October surprise when it comes to its worst breakdowns. August and September tend also to be bad months.
Just as with the Great Depression, the dot-com bust played out in a series of major plunges over the course of years before the market finally found its bottom. In neither case was the great “crash” a relatively straight line of decent to the bottom. There were many attempted-and-failed rallies along the way. As with the 1929 stock market crash, the first plunge in the dot-com bust-up wasn’t even the biggest. Although in 1929, Black Tuesday came only a couple of weeks after the first big drop, during the dot-com collapse, the biggest plunges over the cliff would be either the fourth of fifth of the major drops (the fourth being the steepest, the fifth being slightly longer in duration).
What the dot-com bust made most clear is that the nation’s biggest stock market crashes are not airplane slams into the ground with a burst of flames but slow-motion train wrecks. That is to say, they happen over a protracted period. That’s not immediately obvious in our memories because when we think of them, we tend to label them by the most horrifying plunge that really got everyone’s attention.
You can also see that people had a major warning of the dot-com bust in the form of a huge foreshock in late Summer and early fall of 1998. As with major earthquakes, there are always foreshocks and aftershocks that play out for months around these big shakeups. You’ll also see the foreshocks and aftershocks confirmed in the anatomy of the our nation’s second-most memorable stock market crash: