What Causes a Stock Market Crash?

The Wall Street crash of 1929, also known as the Great Fall, was a major U. S. stock market crash that occurred in the fall of 1929. It began in September and ended in late October, when stock prices on the New York Stock Exchange plummeted. While investors found some relief in mid-summer, concerns about a sustained recession resumed in late August, as the S&P500 and the Dow fell by more than 4%.

Any activity outside these parameters could be considered an active day in the stock market, for better or worse. A stock market crash is a sudden and sharp decline in stock prices across a wide range of markets and sectors. It is usually caused by a combination of factors, such as speculation, rising interest rates, economic recession, and overvaluation of stocks. When the stock market falls, it can be difficult to see the value of your portfolio decline and do nothing about it.

It can be especially difficult to see your portfolio shrink in a year in which you may have fallen ill, grieved, or lost or changed jobs due to the COVID-19 pandemic. The Wall Street crash of 1929 ended the Roaring 1920s and started the Great Depression. The stock market shrank so much that it would take until 1954 to fully recover its pre-fall value. The main cause of the Wall Street crash of 1929 was the long period of speculation that preceded it, during which millions of people invested their savings or borrowed money to buy stocks, driving prices to unsustainable levels.

Other causes included a rise in interest rates by the Federal Reserve in August 1929 and a slight recession earlier that summer, contributing to the gradual fall in stock prices in September and October, ultimately leading investors to panic. Many factors are likely to have contributed to the stock market crash. Among the most prominent causes were the period of unrestrained speculation (those who had bought shares on margin not only lost the value of their investment, but also owed money to the entities that had granted the loans for the purchase of shares), the tightening of credit by the Federal Reserve (in August 1929, the discount rate rose from 5 percent to 6 percent), the proliferation of holding companies and investment trusts (which tended to create debt), a multitude of large bank loans that couldn't be liquidated, and an economic recession that had begun in early summer. In addition, the cost of capital may be different from the allowable return due to inaccurate (or incorrect) or changing capital market conditions.

This was an outstanding economic performance that would normally justify stock market optimism. After peaking, economist Irving Fisher proclaimed that “stock prices have reached what appears to be a permanently high plateau.” While New York stocks protected commercial banks, the stock market crash continued to hurt trade and manufacturing. After utilities fell in price, margin buyers had to sell and there was a panic sale of all the shares.

Willis Pankiw
Willis Pankiw

Passionate social media specialist. Certified social media guru. Unapologetic bacon fanatic. Passionate tv trailblazer. Hardcore twitter trailblazer.