THE STOCK MARKET CRASHES OF 1929 and 1987
On the surface, there was a similar pattern to the stock market crashes of 1929 and 1987. In both cases, stock prices rose dramatically, crashed suddenly, and investors suffered tremendous losses. However, the economic conditions leading up to the two events were considerably different, and significant differences can be found in the economic policies following the market declines. Because of these differences, the consequences of the 1987 crash are likely to be far less severe than those of 1929.
The greatest similarity between the two market crashes can be found in market behavior and stock prices leading up to and during @the collapse. In both cases, rising stock values were fueled by speculation and the bubble ultimately burst. The stock market of the late-1920s has been called "a Sambler's paradise" because of the rapid gains in stock prices. But analysts point out that the market conditions "bore little relation to current or prospective business conditions or to the level of profits." Between 1925 and September, 1929, industrial output grew by 25% and business pro+its grew by less than 50%, while average stock prices more than doubled (Aldcroft, 1981, pp. 195-196). Stock values o+ the time were simply not justified by business and economic conditions.
In 1987, the market also rose rapidly before it plunged. The Dow Jones average exceeded 2700 points in August and some speculators had visions of 3000. After the crash, Frank Korth, senior vice president of Shearson Lehman, acknowledged that it never should have reached 2700: "We probably should have been trading around . . . 2000 . . . based on interest rates, corporate earnings and other fundamentals. We were 700 points ahead on sheer greed" ("Panic," 1987, p. 26).
While speculators were active in both events, and market prices could not be maintained by business conditions, underlying conditions were very diff...