USA TODAY International Edition
Market crash like ’ 29 unlikely but possible
Investor knowledge, safeguards will help
Few people are alive anymore who remember living through the stock market crash of 1929. But plenty of people still view that fateful plunge as a worst- case scenario for what might befall investors.
The roughly 20% decline for large stocks in October 1929 wasn’t the market’s worst month ever, but the drop incited nearly three years of relentless selling and helped to usher in the Great Depression. Could a 1929- style market setback happen again?
Yes, it could.
In fact, the 57% plunge from Oct. 9, 2007, to March 9, 2009, was a stark reminder that severe stock- market losses are still possible, though that downdraft wasn’t as pronounced as the 83% tumble from October 1929 to June 1932. Future declines could be even worse if triggered by a cataclysmic war, deep depression, health crisis, major political upheaval, natural disaster or other trauma.
Besides, human emotions haven’t changed much over the past nine decades. If anything, the possibility of mass fear, panic and confusion has broadened now that news, opinions and rumors can be sent around the world in a matter of seconds.
But a 1929- type crash, with the investment devastation that followed, isn’t likely to recur.
The world has changed considerably in those nine decades, often for the better. People now have a much better understanding of how investing and the economy work, and many important protections and safety nets are now in place. Those buffers make severe sell- offs less likely and improve the odds of surviving one.
More safeguards in place
More stock markets have emerged and expanded across the globe, and many new industries have proliferated, providing not just more opportunities but a greater cushion against collapse through diversification, or spreading your eggs among many baskets.
“Utilities, industrials and railroads really dominated back then,” said Mark Stoeckle, CEO and senior portfolio manager of the Adams Funds, an investment company that has spanned the full 90 years. Compared with what he said were three major U. S. industrial groups or sectors in 1929, there are at least a dozen or so today, including health care, financial services and technology, focused around the computer revolution.
The Adams Funds had the tough luck to debut just weeks before the October 1929 crash, though the group survived and prospered. Stoeckle credits the funds’ success to sound stock selection and a focus on longterm investing that wasn’t widely apparent back then.
Government regulations also provide protections. Investor- oversight agencies like the Securities and Exchange Commission didn’t exist during the laissez- faire 1920s. Nor did FDIC deposit insurance or government oversight of the banking system as it exists today.
Bank failures proliferated as the Depression deepened, and many people lost their life savings. At many times in the nation’s past, bank panics were more calamitous and impactful than
stock- market crashes, and banks engaged more heavily in speculation.
Many other regulations now protect investors and consumers generally. They include laws that cleaned up the mutual fund industry and now protect investors when brokerages fail. These programs and agencies don't prevent people from suffering market losses, but they do constrain foul play and bolster confidence in the system.
“There's much greater availability of good- quality information, which has made the markets more efficient and put them on a more even playing field,” said Harry Papp, an investment adviser at L. Roy Papp & Associates in Phoenix.
Better understanding of investing
One of the remarkable things about investing in the late 1920s was how speculative and disjointed it was. People didn't just buy stocks; many leveraged their holdings by borrowing heavily to make those purchases.
Leverage helps to boost your returns in a rising market. But when prices fall, you need to ante up more cash or your broker will sell your positions, typically at a loss – somewhat similar to facing foreclosure if you can't or won't make mortgage payments in a slumping housing market.
Today, stock- market investors seeking to leverage returns can use options, which weren't widely available back then, Papp noted. With options, your loss is limited to what you spend to buy the contract.
Investing knowledge has improved in many other ways, too. For example, there's a much greater appreciation of how diversification and asset allocation can reduce risk. Many people routinely follow strategies such as rebalancing, where they take profits from high- flying investments and deploy proceeds in assets that have lagged.
Today's investors also enjoy the hindsight of nine more decades of market and economic history. We have learned that bull markets typically last longer than bear markets and rebounds often come swiftly before anyone gives the all- clear signal.
“We have a much better idea now what happens in various ( market) environments,” said Stoeckle. And that underscores the importance of investing for the long term, he added.
Policymakers including those at the Federal Reserve likely have learned their lessons, too. A Fed- implemented tight- money policy around the time of the crash has been blamed for making the ensuing economic downturn worse.
“Banks were collapsing and there was a terrible contraction in credit when the correct action would have been to expand the monetary supply,” Papp said.
Investors are even more conservative today than is commonly realized. Americans remain skeptical of the stock market, despite long- term returns that dwarf those of other investments. That skepticism is reflected in a more cautious attitude toward risk than was prevalent back then.
Memories of 1929 might not be fresh, but they linger.