How Far Could Stocks Fall?

The twin shocks of the coronavirus and the oil price war have hit the market hard. How far could stocks fall? With the possibility of more market weakness in mind, we look back at the 1929 stock market crash leading up to the Great Depression for indications of what is to come.

The Stock Market Crash that Ended the “Roaring Twenties” Stock Market

The 1929 stock market crash that ushered in the Great Depression was not a one day event and was not confined to October of 1929. There was a 10% correction of the market in March of 1929. And, the market came down 30% from its former high during the month of September. Then the market had three terrible days on Black Thursday, Black Monday, and Black Tuesday. On Black Thursday the market fell 9% before it rallied to “only” a 2% loss. In fact, the market recovered on Friday. But, on Black Monday it fell 12.6% followed by another 11.7% loss the next day, Black Tuesday.

Although the Dow fell more than 22% during the “Black” days, it continued to slide and have significant bad days for the next three years! The Dow Jones Industrial Average stood at 305 as the market opened on Black Thursday and by July of 1932 it was down to 41.22 for an 89.2% loss from its early September high of 381.17.

The stock market had been appreciating at about 20% a year during the 1920s and buying on margin was very popular a “playing the market” always seemed to be a good thing. In was, in fact, after the end of the market slide that Benjamin Graham introduced the concept of intrinsic stock value.

Lessons from Previous Stock Market Corrections and Crashes

To the extent that a market is overbought and overpriced, there will be a substantial correction and then a relatively prompt recovery. To the extent that there are underlying problems as well (such as those of the housing crisis in 2008) the effects will be worse and the recovery slower. The two prime examples are the dot com crash and the 2008 crash. The other aspect to watch is that the market prices in expectations. Now that investors are expecting worse days ahead, they are selling and driving prices down. When they start to see a brighter future, the market will rise ahead of the conditions of the day. Investing in stocks always has to do with predicting the short and long term future.

The Value of Perspective in Investing

The old saying is that there is never anything new as everything has happened before. With that thought in mind, we read about Warren Buffett’s comments about the double whammy of the coronavirus and oil price war.

According to Market Watch, Buffett is less concerned now than in 2008.

“If you stick around long enough, you’ll see everything in markets,” he said from his Omaha headquarters. “And it may have taken me to 89 years of age to throw this one into the experience, but the markets, if you have to be open second by second, they react to news in a big time way.”

While it may have been scarier in 1987 and 2008, at least to Buffett, there’s no denying that it’s been a brutal stretch for investors. On Monday, the Dow Jones Industrial Average DJIA, -4.896% dropped more than 2,000 points before recouping a chunk of those losses on Tuesday.

Of course, as we noted in our article about Buffett’s silent warning for investors, he is sitting on about $120 billion in cash and waiting for prices to come down to where he will start to buy.

The points we would like to make are these. The slide of the market could be longer and more severe than many could ever imagine. And, there is always a recovery once the bloodletting has ceased. Those who preserve enough cash to invest once the market has bottomed out will find excellent values that will reward them for years to come.

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