The Stock Market and our Economy

January 24, 2008

The economy is in sad shape. The Dow Jones Industrial Average is just over 12,000, down from a peak of 14,000 just a few months ago. It doesn’t seem in any hurry to recover. President George W. Bush has announced a stimulus package, including tax rebates to millions of families. But will it effect a long-term cure? I just want my mutual funds to gain a little back. I invested my Christmas bonus of $1500 and the value has already dropped to $1300.

The market gained a little since yesterday, but has fallen back this afternoon. I read a piece on the Crash of 1929 yesterday – actually it was the transcript of a PBS special. It was so interesting.

Our nation had won WWI and had enjoyed years of prosperity. Everyone was in the stock market; the “movers and shakers” of the era touted the Market as a way that everyone could be rich. The market was going up, up, up, and people were borrowing money to invest ("buying on margin"). No one thought it could end and would only get better. People got complacent and over-confident.

Then for whatever reason the market took a dip. Everyone got scared and sold what they had, which drove prices further down. Soon stocks were worthless.

People are more cautious nowadays. We diversify our investments. And of course more market controls are in place now (such as the Securities Act of 1933, which regulates original issues of securities [commonly known as "IPOs" or Initial Public Offerings]; and the Securities Exchange Act of 1934, which regulates secondary trading of securities).

But, credit is all too easy to procure, and I believe that will be a huge downfall for us. Are we getting complacent and over-confident like our forefathers? Are we due for another crash?