If you asked people when The Great Depression began and ended, most would probably reply that it began on October 24, 1929 (Black Tuesday, the day the stock market crashed). Most people would also tell you that it ended with the beginning of World War II (for the United States), when the Japanese bombed Pearl Harbor, Hawaii, on December 7, 1941. From beginning to end, that would be more than 12 years and comprise the entire decade of the 1930’s.
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What Happened to the Stock Market during the Great Depression?
Did the stock market also fall for 12 years? No, it didn’t. Look at the chart below and you’ll see how stocks moved during this time.
This chart shows the huge rise in stock prices in the 1920’s — 6 times increase over just 8 years (1921-1929). Compare that to the 2 times increase that occurred in the stock market from 2002-2007, or the 2 1/2 times increase from 2009-2016. The cause for this metoric rise was a huge increase in credit to buy stocks known as margin borrowing. Almost everyone in the nation was investing in stocks with little knowledge of how the market really works or how much risk they were actually taking. They just believed that stocks would keep climbing forever and everyone would get rich. We believe what we want to believe. There is good reason why they call it “the roaring ’20’s”. They were getting rich and having lots of parties.
When the crash finally came, the pain was widespread. Selling led to more selling as investors tried to cover their margin calls. In 2 1/2 years, the stock market lost 90% of its value. It’s true the economy continued to be awful — the federal government did not know they needed to add liquidity (money) to the economy and they did the opposite — they actually contracted the money supply and made things worse.
But the stock market went up after the summer of 1932. In fact, stocks climbed 4 times in 5 years (1932-1937).
Note the following about The Great Depression —
- The great crash in stock prices from 1929-1932 was due to the huge increase in stock prices over the 1920’s (think Bubble!).
- The economy was truly awful in the 1930’s, but the stock market only fell for 2.5 years. It’s also interesting to note that the bear market of 2000-2002 lasted about 2.5 years, the approximate length of time that other bear markets last in current times.
- The average investor was like a deer in the headlights and got financially crushed in 1929. Many lost all their money.
- Knowledgeable investors made huge amounts of money, even when stock prices were falling! (see below) They did this by selling short.
Some things never change. Educated investors make a lot of money in the stock market while average investors often lose money.
(click on the chart for a larger image)
Traders and investors who knew what they were doing made tons of money while many around them lost everything.
The great trader, Jesse Livermore, was one of them. After Black Tuesday, his wife started to pull the furniture out of the house to put on sale, thinking they had lost all their money. Jesse told his wife to put the furniture back inside and informed her that he made more money trading stocks that day than any other day in his life!
Another notable person who made out very well at this time was Joseph Kennedy, Sr., father of future politicians Ted Kennedy, Robert Kennedy, and president John F. Kennedy. Joseph Kennedy, Sr., made a fortune in the bull market of the 1920’s at his own securities firm. He was also outside Wall Street when a bomb exploded on September 16, 1920, that threw him to the ground. We can only speculate how U.S. and world history would have been different if he had been killed in the blast or failed to make his fortune on Wall Street, making it impossible or unlikely that his sons would have succeeded as politicians to the degree that they did.
For more information about Joseph Kennedy, Sr., read about him at Wikipedia.com — Joseph Kennedy, Sr.
Joseph Kennedy, Sr.
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