A Deep Breath Before the Long Drop

Investors breathed a sigh of relief on this day in 1929. The Dow Jones Industrial Average (INDEX: ^DJI  ) staged a strong recovery rally after two days of losses following an all-time market high. The declines, which began after notable statistician Roger Babson predicted that "sooner or later a crash is coming," were to mark the beginning of the deepest bear market the Dow has ever seen. The timing of his call would transform the "Babson Break" into Wall Street legend.

Street insiders took the rebound as an opportunity to belittle Babson's bearishness. One investment trust manager told The New York Times that the prices of "good" stocks would be higher than ever at the start of 1930. This unnamed manager voiced confidence in his trust's basket of railroads, utilities, industrial manufacturers, and banks. Others clucked that a temporary drop was to be expected, but the vast majority of investors the Times surveyed expected the Dow to end higher in six months, based on "continued prosperity."

On Sept. 6, 1929, despite two days of steep declines, Wall Street's brokers took out another $137 million in loans to buy stocks on margin, which would equal $1.8 billion today. Total loans outstanding exceeded $8 billion after the day's borrowing -- a monstrous sum at the time.

The broad rally on that day very nearly eliminated the previous day's losses. Radio Corporation, later RCA, gained nearly 10%, and General Motors (NYSE: GM  ) gained nearly 9%. Both high-tech market leaders set new highs on the rebound. The surge was at least partly the result of the two companies' new sales partnership, which allowed GM to offer Radio Corp's radiolas and victrolas in its retail locations throughout the world. Golly gee whiz, isn't that just the cat's pajamas?

Allied Chemical, which had recently established itself as a leading global ammonia producer, gained nearly 4%. After a series of mergers, it is now part of industrial conglomerate Honeywell (NYSE: HON  ) .

Major national retailers Tobacco Products Corporation and the United Cigar Stores Company completed a merger today in 1929, forming the United Stores Corporation. Though its chain of mergers, breakups, sales, splits, and holding corporation changes became somewhat dizzying over time, this merged company was in fact an important corporate root of tobacco giant Philip Morris, now Altria (NYSE: MO  ) .

The U.S. Attorney General also shut down a pump-and-dump newsletter on this day in 1929. The owner was charged with mail fraud for running -- and I quote The New York Times on this -- a "financial speakeasy."

The gains of Sept. 6, 1929 wouldn't last. Stay tuned for more history of the Crash of 1929, as well as other notable events in the long history of the Dow Jones Industrial Average. If you're looking for retail stocks that can adapt to changing times like Altria, the Fool has three suggestions. Get the inside scoop on these great long-term opportunities in our brand-new exclusive free report.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

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Read/Post Comments (4) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2012, at 11:44 AM, back2back51 wrote:

    Enough of the "tabloid headlines". We read Motley Fool because we want to, not because of some "teaser" headline.

    If I want to see bogus headlines, I can stand in the checkout line at the local supermarket.

    Let's be professional. This article has NO relevance to today's market climb. To infer that the climb is preceding an steep deline as in 1929 is absurd.

  • Report this Comment On September 06, 2012, at 11:54 AM, wolfman225 wrote:

    ^According to the article, that's what was said about Mr. Babson at the time. I'm sure many said then what you're saying now.

    It may not be correct, but that doesn't mean it's absurd and your rude comment, which so closely parallels what was said of Mr. Babson, kinda makes this article relevant.

  • Report this Comment On September 06, 2012, at 12:01 PM, TMFBiggles wrote:

    @ back2back51 -

    This article infers no such thing. It was written before the market opened, and any similarities between market movements in 1929 and today are purely coincidental.

    - Alex

  • Report this Comment On September 06, 2012, at 6:22 PM, xetn wrote:

    If you would like to learn the "real" reason for the 1929 crash and the resultant "great depression" read Murray N. Rothbard's America's Great Depression available for free at:

    http://mises.org/document/694/Americas-Great-Depression

    Your choice of file types.

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