Tuesday, October 14, 2008

A Brief History of Stock Market Crashes, Part 1

The financial malaise triggered by the credit crunch erupted more than 1 year ago in the US, was earlier largely confined to the US and Europe. In Singapore, perhaps it is the near-collapse of AIG that brings home the fact that no one will be spared from the financial carnage. The recent weeks' plummeting of shares in the global bourses have also put spotlight onto the financial world - where many are attracted by the possibility of money snowballing. However, the focus now is the rapidly diminishing value of the money.

With the many reports on the financial news, let's us first take a look at the brief history of stock market crashes. Since the Great Depression in 1929 till the current crisis of confidence, there are a total 7 stock market crashes.

For this post, I will list down the first 3 stock crashes and their lessons for us.

1. The Great Depression in 1929
This was the stock crash that took the longest to recover - 12 years. Ironically, it was the advent of World War II (WWII) with increase Government spending that pulled the economy up.

The main reason for the crash was due to speculative play at the stock exchange. Many were willing to pay a high price for stocks as they believed that someone would pay an even higher price for it. As the stock prices were not supported by economic or company fundamentals, they eventually succumbed when things turned sour.

Black Thursday came on Oct 24, 1929 after one month of volatile trade. Prices plunged by 40% from Sept 1 to Oct 31, 1929. Over a 3 years period up to Jul, 1932, the correction was 90% downwards. In 1933, the gloom in the Wall Street filtered down to the Main Street and the world went into global depression for 12 years.

The Great Depression is now the benchmark of how far the economy can fall. It is definitely not a pleasant experience for us to re-live that experience.

2. The Oil Shock in 1973
Recovery time for this stock crash at 9 years was the second longest. Politics between the oil-rich countries and US was the main reason for the crash. Unhappy with US, oil producers raised oil prices by 4x and stopped oil shipment to US and their allies in Western Europe and Japan. This outward show of displeasure led to a strong surge in oil prices feeding into other parts of the economy.

Inflation ensued and the then-impending recession was exacerberated. It was during this period that the world experienced "stagflation" - stagnating wages with high inflation .

The short-lived stabilisation in oil prices in late-1970s was quickly overtaken by sharp spikes oil prices with the break-out of war between Iraq and Iran. Light at the end of the tunnel was only visible come 1981.

Today, this era is often used as a reminder of how oil price peaks could impact the world economy. Much progress has also been made in the search of alternative energy to reduce our heavy reliance on oil to power the economy.

3. Black Monday in 1987
This stock crash held the record with the fastest of 1 year because the world economy was healthy. The cause of the crash was due to computer glitches.

On 19 Oct 1987, a group of investors moved en masse out of stocks. This triggered the computer automation to cut traders' losses with the issue of large number of sell orders. Driven by fear, many more investors dumped stocks, causing the stock prices to dive further.

Dow Jones Industral Average plunged 22.6%. This was the biggest percentage drop in history - wiping out US$500 bil (S$742 bil) in a single day.

This episode shows the volatility of the stock market with panic over-ruling rationality. However, it also shows that if the fundamental is strong, the market will rebound in no time. Hence, the saying in the stock market that the brave will be rewarded.

End of Part 1
That's all for this post. In many analyst reports, there are a lot of congruences drawn with the Great Depression. Yet at the same time, many believe that the 1997 Asian Financial Crisis (that's stock crash number 4) has strengthened the banks' position in Asian and they are more able to weather this storm. Nonetheless, the knock-on effects from the slowdown in US, Europe and Japan, are undeniable. And it's official - based on advance estimate for 3Q08, Singapore has entered into its first technical recession since 2001.

I will be continuing on the next four stock crashes in my next post. Do look out for it.

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