The current economic downturn is the worst since the great depression. The current market crash has been pretty similar to the ‘Great Crash of 1929’ which led to the great depression. In both the cases stocks fell almost 50% within a very short period of time. A look at the Dow Jones Industrial Average (stock market index for the US) shows a pretty similar pattern in both cases.
July, 1929 - December, 1929
July, 2008 - December, 2008
However, what is not common knowledge is that the ‘Great Crash of 1929’ was just the beginning. The 50% fall is stocks looks like a tiny fall, compared to what happened after that. The markets recovered briefly after the great crash, but thereafter they kept going down for a long time. Eventually, the market lost close to 90% of its value!
July, 1929 - August, 1932
The two major reasons for the fall were the collapse of global trade (due to the Hawley-Smoot Tariff bill) and deflation. While there is a remote possibility of a global trade war happening today, there is a very real danger of deflation. If it happens, the stocks could head lower than the levels we have seen in 2008.
After the great crash of 1929, experts may have told the people - it is a good time to buy stocks with a ‘long term horizon’. However, people who would have taken that advice would have had to wait for a quarter of a century just to break even!!!
July, 1929 - May, 1955
***
This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can also be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.
Posts
good story; feel sorry for people who bought stocks at the peak in 1929
ReplyDeleteVery nice :)
ReplyDelete-ND
Good data...but whats a conclusion? This time as well long term is quarter of a century?
ReplyDelete