The Wildest Week in Dow History Nears Its End

On this day in economic and business history...

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) suffered two of the worst days in its history at the end of October in 1929. But after the carnage swept through Wall Street on the last Monday and Tuesday of the month, the Dow enjoyed one of the most incredible rebounds in its history on Wednesday, Oct. 30, 1929. The index gained 12.3% in a feeding frenzy that saw almost 11 million shares traded on the exchange floor. Despite the bounce -- which remains the third-largest one-day percentage gain in history nearly a century later -- the Dow still found itself 14% lower than it had been before Black Monday began and 32% lower than its early September peak.

The record-breaking weeklong torrent of trading -- so intense and prolonged that many young trade runners passed out on the floor of the National City Bank from exhaustion -- pushed acting New York Stock Exchange President Richard Whitney to suspend Friday's session so that brokerage firms could catch up on their paperwork. The four-day week that closed out October in 1929 remains the most spectacularly violent in Dow history to this day, as the average absolute daily change was a shocking 10.8%. More importantly to those in the middle of the action, the double-digit pop of October 30, coming immediately on the heels of two terrible declines, seemed to signal the return to good times prophesied after Black Tuesday.

"The most dramatic decline in market history... appeared to have reached a definite bottom yesterday afternoon," wrote the Washington Post. "Everybody in Wall Street," wrote The New York Times, "was talking about psychology. ... A new era of good feeling pervaded the financial district. ... smiles of hope, if not of confidence, took the place of poker faces." 

Even nonagenarian oil billionaire John D. Rockefeller, founder of Standard Oil, got into the action, publicly declaring that earlier declines had gone too far and that he was buying "substantial amounts" of stocks. Rockefeller's comments to reporters echoed earlier statements by business and political leaders about the American economy's strength and integrity, and he was said to be particularly interested in buying more shares of the "Baby Standards" that later became ExxonMobil (Standard Oil of New Jersey) and Chevron (Standard Oil of California).

October 30 appeared to be a turning point in the tumult of late 1929, and Dow only declined by a further 4% through the end of the year. Rays of light shone down on Wall Street in the early months of 1930 as the Dow climbed rapidly, gaining 8% in January and rising nearly to 300 points, a level not seen since before Black Monday, by early April. The Dow would not see these heights again for a generation.

But by the end of 1930, hope was effectively crushed by an annual decline of 34%. The following year was even worse, as 53% of the Dow's value was destroyed. The Dow, which had closed at 258.47 points on Oct. 30, 1929, did not pass this level for good until 1951, and it did not break out above the 1929 bull market peak of 381.17 points until 1954.

Is it over yet?
A month after Britain's abandonment of the gold standard sent shockwaves through the global economy, President Herbert Hoover proclaimed on an imminent return to growth Oct. 30, 1931 that -- like many things other he would say and do about the economy during his tenure -- proved to be completely wrong. The Washington Post transcribed his speech:

I am happy to note the very great change which is evident in the credit situation ... Following the abandonment of the gold standard in England a wave of great apprehension spread over the country. Hoarding of currency rose to the high point of $200 million a week between that time and the announcement of the credit pool ... Country bank failures had risen to nearly 25 a day during this period. At the same time the drain of gold abroad due to the alarm of foreign holders of American credits had risen to as high as over $200 million a week.

Evidence over the last week indicates that not only has hoarding ceased, but actually $24 million of hoarded money has returned to the banks. The small bank failures have almost ceased -- the last report showing only seven out of 20,000 total.

Bank failures, which had numbered in the hundreds each year throughout the Roaring '20s, spiked during Hoover's tenure. Some 1,350 banks failed in 1930, and despite Hoover's note of optimism in the speech above, another 2,300 banks shut their doors in 1931. Another 1,450 failed in 1932, and President Franklin D. Roosevelt inherited such a precarious situation that his first major executive action was to declare a nationwide banking holiday in 1933. Despite this bold effort, a shocking 4,000 banks failed in 1933 before the financial system began to get back on its feet. Depositors lost $1.4 billion in this failure tsunami, equal to about 2% of the national GDP by the end of 1933.

Welcome to the big time, Ronald
The Dow added two consumer superstars to its roster on Oct. 30, 1985. Altria (NYSE: MO  ) , then Philip Morris, joined the index after acquiring previous Dow component General Foods, becoming perhaps the only Dow component in history to actually buy its way onto the index. McDonald's (NYSE: MCD  ) was the Dow's other addition, replacing American Brands, which had been the Dow's tobacco-industry representative before Philip Morris' ascension.

The Dow, which was in the early phase of a massive secular bull market, grew eight times larger in the quarter-century that followed this change, but Altria and McDonald's pulled far more than their weight during that time. From 1985 to 2010, McDonald's shareholders enjoyed total growth of 2,800%. During this period, Altria's shareholders enjoyed an astounding 8,200% return, which included the benefits of the multibillion-dollar spinoff of its remaining food business, before it was removed from the Dow in early 2008.

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"Be fearful when others are greedy" is a perfect quote for these early days of the Great Depression when no one seemed ready to believe the worst. It was coined by Warren Buffett, a child of that era who's made billions as an investor by using the lessons he learned growing up in those lean times. Now, Buffett wants you to be able to invest like him, and it starts with an understanding of his style, which is easy to understand but difficult to adhere to over the long term. If you're ready to become the next great long-term investor, then it's time for you to tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


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