Stock Market Vs. Economy

Maybe the stock market really has been predicting the future of the economy. One victim of the new theory could be the idea that the continuing fall of stocks is nothing more than a correction of the 1990's bubble, rather than a cause of new economic problems. Ratings of the economy's condition have fallen to their lowest level since 1994, according to an ABC News/Money magazine survey and one by the Conference Board. These worries seem to have led to small cuts in consumer spending, with sales weakening, even at Wal-Mart. Still struggling to revive profits, businesses have reacted to the drop in confidence and a war in Iraq by making a new round of cutbacks. Office vacancy rates have risen. Airline travel has also stopped growing.

Most worrisome, many companies have turned to layoffs again. Although the Labor Department reported that the unemployment rate eased slightly in earlier months, a separate survey found that business payrolls fell for the first time in five months. During all this time the stock market was increasingly falling.

The crash of the stock marker in 1929 had a devastating effect on the economy.

The stock market crash ushered in the Great Depression. Throughout the twentieth century, most of the capital in the United States was represented by stocks. A corporation owned capital. Ownership of the corporation in turn took the form of shares of stock. Each share of stock represented a proportionate share of the corporation. The stocks were bought and sold on stock exchanges, of which the most important was the New York Stock Exchange located on Wall Street in Manhattan.

Throughout the 1920s a long boom took stock prices to peaks never before seen. From 1920 to 1929 stocks more than quadrupled in value. Many investors became convinced that stocks were a sure thing and borrowed heavily to invest more money in the market. But in 1929, the bubble burst and stocks started down an even more precipitous cliff. In 1932 and 1933, they hit bottom, down about 80% from their highs in the late 1920s. This had sharp effects on the economy. Demand for goods declined because people felt poor because of their losses in the stock market. New investment could not be financed through the sale of stock, because no one would buy the new stock.