In Bill Bryson’s book One Summer “America 1927” he touches on the fateful decision by the Federal Reserve to lower its discount rate.
The stock market even before leading up to that fateful decision by the Federal Reserve was fueled by credit.
You could buy $100 worth of shares with $10 down. Brokers or banks were happy to lend you the money at 10-12 percent interest, which they borrowed from the Fed at 4 to 5 percent.
It all worked as long as the stock market went up.
Changing gears, the U.S. was on a gold standard, meaning every dollar was backed by gold. The Fed had a problem with this. To them, the massive amount of gold socked away in Manhattan wasn’t practical or easy to trade with Europe. Therefore, the Fed believed that by lowering rates holders of gold would want to move their savings to Europe to earn higher returns.
It didn’t work out that way.
Instead, the cut in the discount rates or easing, was “the spark that lit the forest fire” according to economist Liaquat Ahamed, igniting The Great Stock Market of 1928. Stocks doubled from their already nosebleed heights, broker loans to “investors” more than quadrupled and stocks could not lose, until they did.
And the rest is history.
Today, much like the 1920s we have a credit infused stock market. We are enjoying the fruits and labor of borrowed money. The stock market always does what it’s supposed to do. We just don’t know when.
Should you sell your stocks?
Hell no. But do make absolutely sure you’re being paid, in the form of dividends. Better yet, own the dividend paying stocks that have consistently increased them. And when you’re asked if you “Sell in May?” you can confidently respond, “No way.”
