Stock market crash of 1973–4
Encyclopedia
The 1973–1974 bear market was a bear market that lasted between January 1973 and December 1974. Affecting all the major stock market
s in the world, particularly the United Kingdom
, it was one of the worst stock market downturns in modern history. The crash came after the collapse of the Bretton Woods system
over the previous two years, with the associated 'Nixon Shock
' and United States dollar
devaluation under the Smithsonian Agreement
. It was compounded by the outbreak of the 1973 oil crisis
in October of that year. It was a major event in the 1970s recession.
's Dow Jones Industrial Average
benchmark lost over 45% of its value, making it the seventh-worst bear market in the history of the index
. 1972 had been a good year for the DJIA, with gains of 15% in the twelve months. 1973 had been expected to be even better, with Time magazine
reporting, just 3 days before the crash began, that it was 'shaping up as a gilt-edged year'. In the two years from 1972 to 1974, the American economy
slowed from 7.2% real GDP
growth
to -2.1% contraction, while inflation
(by CPI
) jumped from 3.4% in 1972 to 12.3% in 1974.
Worse was the effect in the United Kingdom, and particularly on the London Stock Exchange
's FT 30
, which lost 73% of its value during the crash. From a position of 5.1% real GDP growth in 1972, the UK went into recession
in 1974, with GDP falling by 1.1%. At the time, the UK's property market was going through a major crisis, and a secondary banking crisis forced the Bank of England
to bail out a number of lenders. In the United Kingdom, the crash ended after the rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices; over the following year, stock prices rose by 150%. The definitive market low for the FT30 Index (a forerunner of the FTSE100 today), came on January 6th 1975 when the index closed at 146 (having reached a nadir of 145.8 intra-day). The market then practically doubled in just over 3 months. However, unlike in the United States, inflation
continued to rise, to 25% in 1975, giving way to the era of stagflation
. The Hong Kong
Hang Seng Index
also fell from 1,800 in early 1973 to close to 300.
's market was the fastest to recover, returning to the original nominal level within eighteen months, it did not return to the same real level until June 1985. The United Kingdom didn't return to the same market level until May 1987 (only a few months before the Black Monday
crash), whilst the United States didn't see the same level in real terms until August 1993: over twenty years after the 1973–74 crash began.
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
s in the world, particularly the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, it was one of the worst stock market downturns in modern history. The crash came after the collapse of the Bretton Woods system
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
over the previous two years, with the associated 'Nixon Shock
Nixon Shock
The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.-Background:By...
' and United States dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
devaluation under the Smithsonian Agreement
Smithsonian Agreement
The Smithsonian Agreement was a December 1971 agreement that ended the fixed exchange rates established at the Bretton Woods Conference of 1944.-History:...
. It was compounded by the outbreak of the 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
in October of that year. It was a major event in the 1970s recession.
History
In the 694 days between 11 January 1973 and 6 December 1974, the New York Stock ExchangeNew York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
's Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
benchmark lost over 45% of its value, making it the seventh-worst bear market in the history of the index
Stock market index
A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....
. 1972 had been a good year for the DJIA, with gains of 15% in the twelve months. 1973 had been expected to be even better, with Time magazine
Time (magazine)
Time is an American news magazine. A European edition is published from London. Time Europe covers the Middle East, Africa and, since 2003, Latin America. An Asian edition is based in Hong Kong...
reporting, just 3 days before the crash began, that it was 'shaping up as a gilt-edged year'. In the two years from 1972 to 1974, the American economy
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
slowed from 7.2% real GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
to -2.1% contraction, while inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
(by CPI
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
) jumped from 3.4% in 1972 to 12.3% in 1974.
Worse was the effect in the United Kingdom, and particularly on the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
's FT 30
FT 30
The FT 30 is a now rarely used index that is similar to the Dow Jones Industrial Average. It has since been superseded by the FTSE 100, introduced in 1984....
, which lost 73% of its value during the crash. From a position of 5.1% real GDP growth in 1972, the UK went into recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
in 1974, with GDP falling by 1.1%. At the time, the UK's property market was going through a major crisis, and a secondary banking crisis forced the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
to bail out a number of lenders. In the United Kingdom, the crash ended after the rent freeze was lifted on 19 December 1974, allowing a readjustment of property prices; over the following year, stock prices rose by 150%. The definitive market low for the FT30 Index (a forerunner of the FTSE100 today), came on January 6th 1975 when the index closed at 146 (having reached a nadir of 145.8 intra-day). The market then practically doubled in just over 3 months. However, unlike in the United States, inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
continued to rise, to 25% in 1975, giving way to the era of stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
. The Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
Hang Seng Index
Hang Seng Index
The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong...
also fell from 1,800 in early 1973 to close to 300.
Aftermath
All the main stock indexes of the future G7 bottomed out between September and December 1974, having lost at least 34% of their value in nominal terms, and 43% in real terms. In all cases, the recovery was a slow process. Although West GermanyWest Germany
West Germany is the common English, but not official, name for the Federal Republic of Germany or FRG in the period between its creation in May 1949 to German reunification on 3 October 1990....
's market was the fastest to recover, returning to the original nominal level within eighteen months, it did not return to the same real level until June 1985. The United Kingdom didn't return to the same market level until May 1987 (only a few months before the Black Monday
Black Monday (1987)
In finance, Black Monday refers to Monday October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin...
crash), whilst the United States didn't see the same level in real terms until August 1993: over twenty years after the 1973–74 crash began.