The Stock Market

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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...

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... the form of changes to the Federal Monetary policy or the installation of circuit breakers. This all leads to the optimism of the boom we have experienced since the mid 90's, the booming stock market is a natural result of profound economic changes both here and abroad. For starters, the end of the cold war not only has allowed governments to stop spending capital on the arms race and freed up money for more productive uses but it has opened up huge new markets like Russia and Eastern Europe. Companies are focusing on making money by producing goods more efficiently rather than by raising prices, thus inflation should stay low. And there is more capital in the market, coming from baby boomers saving up for retirement. In conclusion the solid footing the current market has should keep from falling like the 1987 and1929 markets when the current boom comes to an end.

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