Can the Stock Market Crash Again?
Historians continue to study the Crash for answers to questions about what really triggered the loss of 90% of the market’s value over the next two and one-half years and what lessons can be learned.
The financial industry has learned some lessons for sure. For example, before the Crash investors could buy stock on the margin with only 10% down.
This huge leverage worked against them when stock prices began falling.
Margin RequirementsMargin requirements are much tighter now and not every investor or every stock is eligible for a margin account.
In 1929, volume overwhelmed the market and it could not post trades, and prices fast enough. Consequently, investors often traded blind.
Technology, which admittedly is an Achilles' heel if it ever goes down, does a better job of keeping pace with volume today.
However, the worst day in market history didn’t occur in the 1929 crash, but in more modern times on Oct. 19, 1987 when the Dow dropped over 500 points and the trading systems were overwhelmed with volume.
Buying PanicIn this crash, as the buying panic rose, complex computer programs kicked in and began issuing more sell orders. Known as programmed trading, these automated systems added fuel to the fire.
When the dust had settled, over $1 trillion in value had disappeared from the market.
Since then, the markets have put some restrictions in place to make sure the market doesn’t run away again. These are designed to let the market catch its breath and cool off if things seem to be getting out of control. For example:
- The market will halt trading for an hour if the Dow drops 10% before 2 pm.
- Trading will halt for two hours if there is a 20% drop in the Dow before 2 pm.
- If the Dow drops 30%, trading is halted for the day.
- Significant events, such as the tragedy of Sept. 11, 2001 may be cause for not opening the markets at all or closing them early to prevent a panic.