Stock Market Essay, Research Paper

The stock market plays a significant role in the health of the economy; the economy has to be strong for a country and its citizens to prosper. In 1929 over a period of two weeks 30 billion dollars disappeared from the U.S. economy, this was the event that started the greatest period of human hardship of the twentieth century known as the great depression. On October 19,1987 the Dow Jones industrial average plunged almost a third of its value. Many investors went completely bankrupt after one day of trading. Both of these crashes came without warning in booming markets are the currently booming markets heading for a collapse? The current market resembles both 1929 and1987 markets but there is a smaller possibility for collapse.

Hostile takeover bids and blockbuster mergers are in the news daily, corporations are reporting record profits, a second term American president is taking credit for a strong economy. 2000 or 1987? This sounds like a report on today’s economy but it is not. The current market resembles that of 1987 greatly, so is the market heading for a collapse? No, not for the same reasons as the 1987 market. In 1987 interest rates rose, the return on a 30 year government bond rose from 7% to more than 10% between January and October. Historically a rise in interest rates drives the stock prices down; in 87 the market ignored the rise in interest rates and kept growing setting the stage for a crash. Inflation was 4% and growing the US Dollar was falling. Today the US dollar is stronger than it has been in years and inflation that is 2.5% and falling also the shrinking national dept should keep interest rates steady. The current market has learned lessons from the 87 crash, a rise in interest rates is quickly echoed by a fall in stock prices and market psychology has changed with brokerages telling their clients to keep less than half their money in equities. Computer programs that would automatically sell stocks if they fell below a certain price caused the big losses in 87; circuit breakers have since been installed to stop the surge of computer trading. The Dow Jones industrial average set a record one gain of 102.27 the day after the crash and within 15 months the market gained back all it had lost. 1987 was a minor compared to what the 1929 crash did to the welfare of the average individual.

The 20’s believe it or not had more in common with the present day than most would think the economy was doing well and confidant economists ensured investors that stocks were the best investment for the long term and were generally risk free. Technology stocks such as those of RCA fueled the market. RCA exerted a remarkable hold over a revolutionary form of mass communication-radio. The company’s top executive David Sarnoff was the Bill Gates of his day, between 1923 and1929 RCA stock rose from $5 to over $500 a share. News of amazing profits like these motivated individuals to loan money to buy stock, investors took advantage of loose margin rules, borrowing nearly 90% of the money they needed to buy the stock. What caused the crash in 29? There are many contributing factors, stocks were over priced, Fraud and insider trading, poor federal reserve policy and margin buying are all to blame for the October 29th nose dive. In the first few hours of October 29th stock prices fell so far as to wipe out all the gains that had been made in the previous year. Public confidence was shattered and those who had bought the now worthless stocks with loans were bankrupt. There was no social safety net in 1929 no welfare no unemployment insurance, the unemployment rate was 25% at the peak of the depression and these people had nothing to rely on. Since then the governments of Western industrialized nations have adopted laws and policies to prevent economical turmoil.

What has been changed since the 1987 crash to prevent another such event? Of course things are much different. The economy is on a firmer footing. And since that

horrendous crash, much has been done to forestall a repeat debacle. For example,

brokerage firms and mutual-fund companies have invested billions of dollars in

technology so that they can answer all the calls and execute all the trades on the

busiest days. The New York Stock Exchange, which has never traded even 1 billion

shares in a day, currently has the capacity to trade 3 billion shares. On the

computerized Nasdaq stock market, capacity was a mere 250 million shares a day in

1987 and is now 1 billion shares, headed for 1.5 billion shares by the end of the year.

The N.Y.S.E. has adopted trading rules that prevent certain computerized stock trading when the Dow is up or down 50 points in a day; the “sidecar” rule gives small orders priority when the market is moving briskly; and “circuit breakers” halt trading for 30 minutes when the Dow is down 350 points and for one hour when it is down 550 points. The rules ensure that investors have time to think.

So are we safe from another Black Tuesday? We can never be sure when the next fall will occur, we can be sure however that it will happen, thus our concern should be to minimize the damage caused by the market fluctuations. There is a feeling among investors that the wisdom learned from past market troubles is protecting us now, weather in the form of changes to the Federal Monetary policy or the installation of circuit breakers. This all leads to the optimism of the boom we have experienced since the mid 90’s, the booming stock market is a natural result of profound economic changes both here and abroad. For starters, the end of the cold war not only has allowed governments to stop spending capital on the arms race and freed up money for more productive uses but it has opened up huge new markets like Russia and Eastern Europe. Companies are focusing on making money by producing goods more efficiently rather than by raising prices, thus inflation should stay low. And there is more capital in the market, coming from baby boomers saving up for retirement. In conclusion the solid footing the current market has should keep from falling like the 1987 and1929 markets when the current boom comes to an end.