The Stock Market Essay

1077 words - 4 pages

The Stock Market

The stock market plays a significant role in the health of the economy; the economy has to be strong for a country and its citizens to prosper. In 1929 over a period of two weeks 30 billion dollars disappeared from the U.S. economy, this was the event that started the greatest period of human hardship of the twentieth century known as the great depression. On October 19,1987 the Dow Jones industrial average plunged almost a third of its value. Many investors went completely bankrupt after one day of trading. Both of these crashes came without warning in booming markets are the currently booming markets heading for a collapse? The current market resembles both 1929 and1987 markets but there is a smaller possibility for collapse.
Hostile takeover bids and blockbuster mergers are in the news daily, corporations are reporting record profits, a second term American president is taking credit for a strong economy. 2000 or 1987? This sounds like a report on today's economy but it is not. The current market resembles that of 1987 greatly, so is the market heading for a collapse? No, not for the same reasons as the 1987 market. In 1987 interest rates rose, the return on a 30 year government bond rose from 7% to more than 10% between January and October. Historically a rise in interest rates drives the stock prices down; in 87 the market ignored the rise in interest rates and kept growing setting the stage for a crash. Inflation was 4% and growing the US Dollar was falling. Today the US dollar is stronger than it has been in years and inflation that is 2.5% and falling also the shrinking national dept should keep interest rates steady. The current market has learned lessons from the 87 crash, a rise in interest rates is quickly echoed by a fall in stock prices and market psychology has changed with brokerages telling their clients to keep less than half their money in equities. Computer programs that would automatically sell stocks if they fell below a certain price caused the big losses in 87; circuit breakers have since been installed to stop the surge of computer trading. The Dow Jones industrial average set a record one gain of 102.27 the day after the crash and within 15 months the market gained back all it had lost. 1987 was a minor compared to what the 1929 crash did to the welfare of the average individual.
The 20's believe it or not had more in common with the present day than most would think the economy was doing well and confidant economists ensured investors that stocks were the best investment for the long term and were generally risk free. Technology stocks such as those of RCA fueled the market. RCA exerted a remarkable hold over a revolutionary form of mass communication-radio. The company's top executive David Sarnoff was the Bill Gates of his day, between 1923 and1929 RCA stock rose from $5 to over $500 a share. News of amazing profits like these motivated individuals to loan money to buy stock, investors took...

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