Sometimes I wonder if I’m ever going to run out of new things to say about the economy. This is noted by a declining pattern of lower highs in the RSI as stocks continue to make higher highs, a sign that the market is topping out”. Average uncertainty about stock market returns increased by 11 per cent during the summer, and it increased again in October-November, by almost an additional 20 per cent. However, a benefit of one of the largest one day stock market crashes in history was the establishment of the circuit breaker system, which now prevents trading of stocks when a stock plummets a substantial amount in one day. If the relationship between the stock market indicators and expectations are the same before and after the crash, their coefficients should be stable across the specifications, and all the interaction terms should be zero. We can now turn to the effects of the interview date in 2008 on expectations in 2008.
The figure shows a strong co-movement of the two time series: increased attention to stock market news coincided with increased volumes in March and July of 2008, February of 2009, and, especially, October of 2008. On October 18 the market went into a free fall, and the wild rush to buy stocks gave way to an equally wild rush to sell. They bid up the stock market in the early part of 1931, even after the major failures started in late 1930. The market is made up of minds of many men and when you put all these men together, everyone has their own views and outlook which could mislead your initial thought process. The estimates imply that disagreement stayed constant before October 2008, but it increased significantly after the crash. At the same time, their holdings in government securities were reduced and open market rates rose, with the call loan rate reaching 8.6% by December.
Of note, Citi’s Tom Fitzpatrick also highlighted the market’s similarities to the 1987 crash just a few days ago. Interestingly, economists that have later examined the fundamentals from the 1920s believe there was not a stock market bubble ready to burst by 1929. Of course, the spin around this takeover deal is that AT&T is trying to get into a new market and create a rival for Netflix.
Decade of strong performance after the first World War, the stock market was euphoric and rose to unprecedented heights. Global stock markets are being routed by growing fears for the global economy and a slump in commodity prices. No one will be able to time the market perfectly (buy at the low and sell at the peak), not even Warren Buffet does that. Throughout a bear market, the only thing that affects a company’s falling share price is the downturn in economic and market conditions. The economy had been showing signs of weakness for months before the stock market crash, and with or without it, a downturn in the normal business cycle was taking place. Bo Polny says this stock market crash is going to occur on the date of October 2 / 3, 2016, the true Shemitah date being October 2. At the same time, short-sellers in VXX — people effectively betting the bull market will persist — have dropped out.
If, on the other hand, people believe in mean reversion in stock market prices, the effect may be of the opposite sign. The stock market crash did not actually cause the Great Depression, but rather contributed to the disaster of the Great Depression, which was caused by a number of serious economic problems. We’re not exactly sure why the Wikipedia article considers the Black Monday stock market crash of October 1987 to be some kind of mysterious black swan event.