The stock market has been expanding rapidly and kind of recklessly, much like it did in the 1920s before the big crash in 1929.
In the stock market’s dynamic environment, companies often experience rapid changes in fortune. However, discussions about today’s economy are still influenced by the memory of the Great Depression, as we see similarities between current concerns and those preceding the historic crash. In today’s stock market, we’re seeing patterns that echo the events leading up to the Great Depression.
Back in the 1930s, the Great Depression was caused by various factors including the infamous stock market crash of 1929, a collapse in global trade, government policies, bank failures, and a significant drop in consumer spending. Interestingly, we’re witnessing similar elements today, which makes us wary of history repeating itself.
On Black Tuesday, Wall Street investors traded some 16 million shares on the New York Stock Exchange in a single day, resulting in billions of dollars lost and wiping out thousands of investors. This event spiraled America and the rest of the industrialized world into the Great Depression, the deepest and longest-lasting economic downturn in the history of the Western industrialized world up to that time.
The crash back then was caused by a mix of things like low wages, a lot of debt floating around, a struggling farming industry, and banks giving out too many loans they couldn’t recover. In the 1920s, the stock market was booming, hitting its highest point in August 1929 due to a frenzy of buying and selling. But behind the scenes, production was slowing down and people were losing their jobs, making stocks way more expensive than they were worth.
Nowadays, we’re seeing some similarities. The Dow Jones Industrial Average hit a record high on Feb. 12, 2020, after a crazy good run, even though it had a big drop on Feb. 5. The lowest point of the year was on Mar. 25, when it hit much lower than before.
Consumer spending is a big deal for the economy, making up almost 68% of the country’s GDP in 2023. But lately, there have been ups and downs in retail sales. For example, Black Friday sales saw a median drop of 4%, and January 2024 saw a noticeable decline, raising worries about whether people are spending less, despite some signs that they’re feeling better about their finances.
Another thing that’s worrying is that people are racking up more debt, even though their wages are going up and they’re saving more. By the end of 2023, consumer debt had reached a whopping $17.5 trillion. While it’s not a crisis yet, it’s starting to look like the kind of borrowing that helped lead to the Great Depression.
The stock market is also giving individuals something to fret about. It’s been expanding rapidly and kind of recklessly, much like it did in the 1920s before the big crash in 1929. Prices are going up because people are hopeful and making risky investments, which is similar to what happened before the crash.
Talk about a possible economic slowdown isn’t helping calm nerves either, even though jobs are growing and wages are going up. The Federal Reserve is being careful with its money policies because it’s worried about prices going up too fast and the economy getting shaky. Some predictions even say that GDP growth might take a sharp dive in 2024.
There are some bright spots, though. Industrial production, which is a big indicator of how well the economy’s doing, is showing some improvement. But there are still some issues, especially in manufacturing and utilities, which point out some weaknesses in the economy.
The connection between what’s happening now and what led to the 1929 crash is pretty clear. The stock market is growing fast, there’s a lot of debt around, and stocks are probably worth more than they should be. But, we have to remember that things are different now. Laws and rules about finance have changed a lot since then, and the world economy is way more connected.
So, given these uncertainties, investors are turning to defensive strategies, favoring sectors like utilities, consumer staples, and healthcare, which are less vulnerable to economic downturns.