Stock Market Crash
No market crash in contemporary history has ever been as severe as the one that occurred in 1929. When the crash of 1929 came at the tail end of the Roaring Twenties, no one had anticipated the devastation that would befall the investing community. The stock market crash of October 2008 started an economic slump that would continue for years, yet such crashes are inevitable when markets correct themselves after false highs.
Beginning on Thursday, October 24th, 1929, the confidence drop in the stock market got considerably worse on Monday and Tuesday that followed. It took the US economy just over 25 years to recover from the Great Depression, which started with those three trade days and lasted a whole month. Share prices did not reach the level they were on the first day of the fall until November of 1954.
So, what was the root cause of this economic catastrophe? As you can expect, there is a wide range of opinions on what caused it, but most people think that the mistaken notion that high share prices could be maintained forever is the most common one. A famous economist, Irving Fisher, said, "Stock prices have reached what looks like a permanently high plateau." This was in reference to the 1920s bull market.
At that time, trading stocks seemed to be the "it" thing to do, and the whole country was preoccupied with the stock market. The speculative boom started with regular people buying stocks, even though they had little idea how the stock markets worked. Because they thought the good times would last forever, a lot of individuals took out loans to buy even more. Ignoring the warnings, they allowed speculation to push prices farther higher, disregarding basic sense.
At the first sign of market overheating, each speculation-based boom inevitably collapses. In early September of 29th, the market peaked, and prices started sliding precipitously, losing 17% of their value in the next month. Hope, rather than logic, drove prices higher even at that point, but the final collapse started when more astute investors cashed out. This set the stage for the Great Depression to begin in 1929 when global stock market confidence plummeted.
