Global stocks have gained significantly from the 2008’s collapse. In the United States, the Dow, NASDAQ, S&P 500, and the Russel have gained by 209%, 448%, 224%, and 297%. In Europe, the DAX has gained by 200% and the FTSE by 81% while in Asia, the Nikkei has gained by 186% while the Hang Seng has gained by 189%.
With stocks at these levels, some analysts have been warning of an imminent correction. To some, this correction could come as a result of algorithmic trading like it happened in 2010. Some have argued that stocks around the world are expensive which could lead to a correction. Others have argued about the increasing consumer debt – particularly auto – and increasing rates of default.
On long-term charts, the technical indicators like RSI and Stochastic are in the overbought territory.
The Bull Run reminds investors of other crashes in the past like the 1929, 1987, 2008, and 2010 when investors lost billions of dollars.
Some analysts have predicted that if a crash comes, it will be worse than what happened in 1929. This is simply because; the authorities will not have enough ammunition to stop it. In 2008/9, the authorities halted the crash by bailing out large banks. The Fed brought interest rates to zero and started Quantitative Easing (QE) to support the market. Today, with interest rates at near zero, and with corporate taxes coming to 21%, a recession would be difficult to contain.
Before the Black Tuesday crash, the market had seen tremendous growth, reaching an all-time high in August 1929.
When making his state of the union address in the previous year, the president talked proudly about the U.S economy. He stated that the economy had never ‘met with a more pleasing prospect than that which appears at the present time’.
At that time, the First World War had ended and America was seeing massive technological advancements with the discovery of the radio and other products.
The level of literacy in the country was increasing and more Americans were entering the job market than ever. Companies like Ford and General Electric were on a hiring spree to meet the growing demand.
With more disposable income, more Americans started investing in the stock market, which was seeing excellent returns. To them, the stock market would only move in one direction; up. In addition, people started to borrow heavily to fund their stock purchases. 2 out of every 5 dollars the banks handed out in loans headed to stock purchases.
In 1928, the Dow soared by 28%.
Then, on October 23rd, the stock market started to unravel as a result of low steel production which led to the failure of several banks. This led to a surprise market fall and then fear started to set in. Investors rushed to exit their positions.
To caution people from losses and improve the market conditions, the president went on radio and assured people on the strength of the economy. Banks started buying stocks.
On Monday, prices, which had regained on Friday started to drop again. By the end of the day, they had lost about 13% of value. This was known as the Black Monday.
On Tuesday, the day started normally with a marginal gain in the stocks. Then, 30 minutes later, they started to drop again. In the trading floors, shouts of ‘sell’ dominated the air and at the end of the day, the Dow dropped by 12% with losses of more than $25 billion. Factoring inflation, that amount is today worth $319 billion.
This fall led to the global recession.
Market conditions today, seem to reflect some of these factors; The stock markets are at an all-time high, unemployment rate is at a 20-year low, and the president regularly talks about the stock market.