If there is a stock market crash you will be able to take advantage of it and get some great prices for yourself. In fact, most of the stock values had merely tracked the rise in expected dividend payments The economy was expanding rapidly, and companies were enjoying this expansion. An independent agency, the Securities and Stock Exchange Commission (SEC), was established to oversee the implementation of the new legislation. Looking at the two panels together, we can see that the volume of trade was the highest at times when the stock market index was decreasing, when uncertainty was increasing and when people paid a lot of attention to news about the market. A sweep by the Democrats would likely have an immediate negative effect on stock prices because it could end the gridlock and lead to changes that are not favored by Wall Street types. Jimmy Walker, for example, asked the movie houses to show only cheerful pictures.
In fact, every time the Fed Reserve mentions raising the interest rate, you can see a sudden and sharp decline in the market. In 1987, of course, the Dow Jones Industrial Average dropped 22.6% in a single session; the 1929 crash involved a 12.8% single-session plunge. The ostensible reason for this fall was that the Saudis had refused to agree to production decreases being pushed by some OPEC members, instead choosing to let the market play out for the time being. That’s right; after periods in which the market rises, the market experiences a massive crash. Before the market crash in 1929, the Shiller P/E was 30. Then, the Dow Jones industrial average dropped 89% over the next several years.
The U.S. economy staged a rapid recovery from the postwar Depression of 1920 and 1921, and between 1922 and 1929 real gross national product (GNP) grew by 22 percent. If you think hard enough about it, you can easily convince yourself markets are primed to crash. Investors need a meaningful percentage (25% or more) of their capital invested in strategies that can go to cash as market trends deteriorate. The coefficients on the interview date dummies in Table 4 show overall changes in the average level, average uncertainty, and heterogeneity of expectations. The 1920s, known as The Roaring Twenties” had been a time of unprecedented prosperity in America, and as the stock market soared, investors used their life savings and borrowed (buying stocks on margin) to take advantage of the boom. Global stock markets are being routed by growing fears for the global economy and a slump in commodity prices.
While the return on your bond and real estate investments might be limited, your stock investments offer the potential for growth when the markets are booming. But the Chinese stock market meltdown is a drop in the bucket compared to the 78 percent implosion when the Dot-bomb bubble burst here in 2000 and the 84 percent shellacking in Russia after that country defaulted in 1998.
The economy had been showing signs of weakness for months before the stock market crash, and with or without it, a downturn in the normal business cycle was taking place. Like Hussman and so many others, I believe that a stock market crash and a new financial crisis are imminent.