The Birth of the Modern Stock Market and the End of the Ford Era

On this day in economic and business history ...

President Franklin D. Roosevelt's first hundred days in office were a whirlwind of legislative activity focused on ending the nation's woes. Those woes were easy to trace -- things had never been the same since the great Crash of 1929. With rancor running high against bankers, financiers, and stock market hucksters, Roosevelt's administration had strong public support as it went after these disgraced masters of the universe, and one of his greatest early accomplishments was signing the Securities Act (then known as the Rayburn-Fletcher Securities Bill) on May 27, 1933.

Before the Securities Act, most stock issues and sales were governed by state laws, which were based on principles of merit. The merit-based state laws had been largely ineffective in preventing securities fraud, as enforcement, prosecution, and oversight were all generally ineffective because of weak provisions, inadequate funding, or deliberate efforts by state governments to look the other way. The act superseded state laws through the Interstate Commerce Clause, which applied to so many possible stock sale methods (telephones, mailings, and electronic transfers are all considered aspects of interstate commerce) that it effectively took over all regulation of large stock issues. This was particularly important in light of the vastly increased breadth of stock ownership preceding the Great Depression -- the number of stockholders increased more than fourfold from 1900 to 1928, to 18 million people, or roughly 10% of the population.

You can thank the Securities Act for the modern practice of mandatory registrations, which allows shareholders and prospective shareholders access to a company's S-1 (filed when going public) as well as its quarterly and annual reports, which must all be independently audited. The veracity of these filings was enforced by the Federal Trade Commission for a year before the creation of the Securities and Exchange Commission, which has overseen stock market regulation ever since.

Roosevelt's statement on the day he signed the Securities Act into law offers some further explanation of its value and importance:

Events have made it abundantly clear that the merchandising of securities is really traffic in the economic and social welfare of our people. Such traffic demands the utmost good faith and fair dealing on the part of those engaged in it. If the country is to flourish, capital must be invested in enterprise. But those who seek to draw upon other people's money must be wholly candid regarding the facts on which the investor's judgment is asked.

To that end this Bill requires the publicity necessary for sound investment. It is, of course, no insurance against errors of judgment. That is the function of no Government. It does give assurance, however, that, within the limit of its powers, the Federal Government will insist upon knowledge of the facts on which alone judgment can be based.

The new law will also safeguard against the abuses of high-pressure salesmanship in security flotations. It will require full disclosure of all the private interests on the part of those who seek to sell securities to the public.

The Act is thus intended to correct some of the evils which have been so glaringly revealed in the private exploitation of the public's money. This law and its effective administration are steps in a program to restore some old-fashioned standards of rectitude. Without such an ethical foundation, economic well-being cannot be achieved.

The act had a notable impact on market results, particularly for stocks traded on smaller exchanges. A study done by Carol J. Simon of the University of California's economics department found that IPOs on the smaller exchanges were frequently and significantly overpriced before the act's implementation of mandatory disclosure rules. After implementation, this persistent overpricing was virtually eliminated. And even if investors stuck to the liquid and well-known issues of the New York Stock Exchange -- now part of NYSE Euronext (UNKNOWN: NYX.DL  ) -- they would often encounter abnormal returns based on incorrect forecasting because of inadequate information before 1933. These abnormal results were significantly reduced across the entire securities industry following the act's implementation.

Relief at last
The Dow Jones Industrial Average (DJINDICES: ^DJI  ) , shot 5.1% higher on May 27, 1970, one day after bottoming out at the beginning of the postwar era's long secular bear market. The rise of 32.04 points that day set an all-time record for point gains, edging out the bounce following President John F. Kennedy's funeral by a single hundredth of a point. However, the gains were bittersweet, as The New York Times wrote that "the 32.04-point advance just managed to recover the 31.01-point loss registered on the index during the first two days of this week."

Few investors understood the reasons behind the rally. Various hypotheses were put forward: President Richard Nixon's meeting with business leaders the previous evening would produce solutions to the nation's economic woes, too many shorts lost their shirts, or the market was otherwise too cheap for its own good and buyers could no longer resist the bargains. The market was undeniably cheap -- its cyclically adjusted P/E had fallen into the single digits by then -- and beleaguered investors, having lost an estimated $250 billion since the start of the market slide, didn't need much encouragement to seek a way out. The rally continued until 1973, but its gains proved fleeting, as much of the market's growth would be built on valuation expansion. The Dow would ultimately remain mired in a long-term stagflationary decline until the 1980s.

The end of an automotive era
The last Ford (NYSE: F  ) Model T rolled off the assembly line on May 27, 1927. That day also marked the construction of the 15 millionth Model T, which made it all the more memorable a day to end the era that brought motor vehicle ownership to the American masses. To commemorate the occasion, a recovering Henry Ford (he'd recently been injured in, of all things, a car accident) and his son Edsel drove out to the factory in the very first Ford car, already a museum piece roughly a quarter century after the company's founding. The old tinkerer showed that his skills had not been lost to time when this "buggy seat attached to bicycle wheels" couldn't start with the coaxing of skilled mechanics -- after a bit of work from Henry Ford's hands, the antique car sputtered right to life.

The end of the Model T had become a necessity by 1927. The model had been released in 1908 and had undergone minimal changes for nearly two decades, even as stiff competition from General Motors (NYSE: GM  ) began to sway the public toward more modern and less sparse alternatives. The Model T was for years America's default choice of car -- Ford claimed 61% of the American market, even in 1921, to a meager 12% for GM -- but low prices alone couldn't sustain its advantage against clearly superior vehicles. Another recent development undermining Ford's sales was the creation of a functional used-car market, which could finally offer much better cars (three or four years after their initial introduction) at comparable prices to the Model T. GM's Chevrolet brand finally surpassed, and eventually doubled, Ford's sales totals in 1927, helped in part by an extended factory shutdown while Ford retooled for its next model. Ford soon regained the lead and held it until 1931 with the launch of the Model A, but that would be its last year atop the sales charts.

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