Few events have had more of a psychological impact on the common investor then the stock market crash of 1929. To this day, any major correction that happens in the market is compared to the '29 crash both in time and severity. The crash ushered in the most severe economic depression in US history.
The Stock Market Crash of 1929
The Roaring Twenties
Up until 1916 most American's worked on farms - farming was the largest industry in the country at that time, but for the first time in US history, around 1920, more people started living in bigger cities.
Before things got really bad, they were really good - this was the properious age of the 20's. This was a time to celebrate - it was the end of World War I (1914-1918), the Age of Jazz, 'flappers', and the assembly line car was in full swing. Thanks to improved productivity from Henry Ford and his assembly line techniques, goods could be produced cheaper. It was an era of renewed confidence and prosperity. With the invention of the radio and television (1920), rocket engines(1926), and the affordable family car(1920)...anything was possible!
Signs of Trouble
The common working man had reason to invest - everyone was doing it, and many were making fortunes, many of them common workers! For the first time, people were taking money out from under their matresses and investing in stocks. From 1920 to 1929 stocks more than quadrupled in price - this is the stuff that makes up a "bubble". Investors were borrowing money off the share price value of their stock to leverage their positions. $8.5 billion dollars were loaned out to investors at that time, and that was more than all the circulated currency in the US at the time.
Common to bubbles, the reality of the economy becomes far removed from true company earnings and stock valuations.
Price / Earnings Ratio - S&P500
However, stocks were not only owned by the uneducated investor or fool, they were owned by some of the top investors and economists in the world at that time. Right before and during the crash, these top professionals truly believed that the market was not priced too high according to the growth of the economy. From 1919 to 1929 total factory productivity was very good, averaging 5.3% per year.
Top economist Irving Fisher stated publicly, "Stock prices have reached what looks like a permanently high plateau."
It has been argued that the 1929 stock market was not overly priced, even by today's evaluation standards. A very common indicator of the value pricing of stocks is called the Price / Earnings Ratio, or P/E Ratio. Even though, at the peak of 1929 the P/E ratio was 33, high by historic numbers, but it wasn't an outlandish level considering the economic growth that took place during the 20's. But there were warning signs well in advance of the crash.
In 1925, the real estate market came off its highs and was falling. Real estate is a good, reliable long-term indicator of economic health because people will frequently spend their money on a place to live before they spend money on their "wants" in life.
Crowds gather outside the
New York Stock Exchange
Bernard Barooke also made alot of money in the stock market. The story goes that before the market crashed in 1929, he used to get his shoes shined every day by the same shoe shine boy. One morning the shoe shine boy was giving him stock tips. Barooke went to his office, called his broker and said, "Sell it all! When shoe shine boys are giving out stock tips, its time to get out."
Joe Kennedy, father of John F. Kennedy, made a fortune during the 1929 stock market crash. He was shorting the market heavily before the market crashed, building a huge stake for the Kennedy family.
The stock market fell from 1929 to 1932 losing nearly 90% of its value before recovering, but it would take nearly 40 years for stocks to reach the price levels they were at before the crash.