Why is it always 1929 again on Wall Street?

When US stock markets dip, the pundits predict instant disaster. Is it all a myth?
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The Independent Online

Down in the basement of every daily newspaper is a yellowing pile of pre-printed sheets ready for newsagents nationwide. On each are the big, black words: ANOTHER 1929?

Down in the basement of every daily newspaper is a yellowing pile of pre-printed sheets ready for newsagents nationwide. On each are the big, black words: ANOTHER 1929?

Every time that Wall Street wobbles, out come the headlines and the hoardings, but are the fears justified? Americans have witnessed the longest and largest bull-run not just since the 1923-29 party but even since the New York Stock Exchange was actually founded to correct a financial fiasco in 1792.

Wall Street has, in fact, seen 31 bear markets, including 14 so-called panics (the Dow dropped by at least one-fifth) and four days when the doors closed. Last century, US bear markets occurred every six years on average up to 1987 when values temporarily dived 36 per cent, the last being 36 per cent in 1987. Iraq's invasion of Kuwait caused a mere correction three years later.

Nowadays, what happens in New York affects the world's markets, but its setbacks hit the City as far back as 1857 when railroads went bust.

Each had a different name - from the Knickerbocker Trust Panic of 1907 when cartels were curbed, to the Kennedy Slide of 1962 after JFK confronted the steel barons.

Though the autumn of 1929 saw the most traumatic trough, it has been made worse by many myths. For example, bankers were unable to jump from the Empire State Building even after it was constructed during the subsequent Depression. The main truth is that, despite Black Tuesday, several stocks ended 1929 higher than they started. The real fall of 89 per cent was from 1930 to 1932, probably anticipating the Depression.

Moreover, there are present parallels with the Great Crash as well as less melodramatic ones. The Roaring Twenties (and the early Sixties) saw so much invention and speculation, using cheap credit, that stocks eventually anticipated two decades of dividends with P/E ratios of 20. Yet 1929 opened with an industrial slowdown.

Another parallel is that today's technological companies had their forerunners in new-fangled businesses like Radio Corporation of America and General Motors. In 1962, IBM and Xerox slumped! Smart investors had looked for safety in 450 mutual funds, most of which were liquidated by 1938 when the Dow dropped 49 per cent. In the Sixties, a new clutch mushroomed from 150 to 350 only to be swallowed in the bear-pit in 1974 when the Dow sank by 45 per cent.

Today, there are almost 5,000 mutual funds divided into at least 30 categories with funds of funds to cut the confusion.

History has also repeated itself at the Federal Reserve where one founder, Paul Warburg, urged caution in words similar to Alan Greenspan in 1997 with his "irrational exuberance" remark.

One difference, but still disturbing, is that only 600,000 Americans actively traded on Wall Street in 1929 when less than one in 20 adults held mutual funds. Now one adult in three is into mutual funds. That is explained by an ominous statistic in Barclays Global's latest stockbroking survey - 2001will see the peak of saving as Americans born post-war near retirement.

If you still think Wall Street will power on perpetually, read The Bear Book by John Rothchild. Among his danger signals: "As of early 1998, 82 million Americans had become shareholders, mostly through mutual funds. At least half that number owned stocks for less than eight years." That was published when the Dow had not yet reached 8,000. But in the run-up to 1929, Alexander Dana Noyes issued similar warnings in The New York Times.

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