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Black Friday and Black Tuesday

Today is the 29th of November 2019 and it’s a Black Friday! There is a lot of excitement amongst shoppers given the massive discounts being offered by retailers all over the world.  Black Friday is an informal name for the Friday following Thanksgiving Day in the United States of America. The day has been regarded as the beginning the Christmas shopping season since 1952. Many retail stores around the world offer highly promoted sales on Black Friday and may also open as early as midnight.

In countries such as the United States of America, Black Friday has routinely been the busiest shopping day of the year. Online stores also invest a lot of money in promotional campaigns to generate more sales and drive traffic to their stores. While Piggy appreciates the idea of taking advantage of certain promotions, it is also important to avoid unnecessary impulse buying.

Impulse buying refers to unplanned decision to buy a product. Research findings suggest that emotions and feelings play a decisive role in purchasing, triggered by seeing the product or upon exposure to a well-crafted promotional message. The fact is that a lot of individuals and households tend to be under pressure to participate in such promotions, especially as we move into the festive season. As a result, households may also end up in a debt-trap, especially when credit is used. In addition, loan sharks also prey on that, extending loans, or giving extra time of repaying or offering more money even if “it’s not really needed”. 

Piggy believes that there is need to exercise caution by sticking to a well-crafted budget by “cutting the coat according to its cloth”. Personal Budgeting is the foundation of effective financial management.  Here is a link to article on personal budgeting;

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On another note, the adjective “black” has also been applied to days upon which calamities such as stock market crashes occurred. A good case study is “Black Tuesday”, 29 October 1929. During that time, many people were so convinced that they could get rich by investing in the stock market to the extent that they borrowed heavily to buy shares. From 1920 to 1929, stocks more than quadrupled in value.  However, the bubble had to burst, and it is estimated that of the USD50 billion in new shares offered during the 1920s, half became worthless by 1930. A record 16.4 million shares were traded on Black Tuesday, and the market lost about 12%. Even the most educated investors lost fortunes!

According to Wicksell and Fisher, market crashes occur when over optimism leads to excessive leveraged real investment and when reality, eventually hits, there is an economic crisis. While there have been many suggested explanations for the Crash, no one can fully account for it. Here are some of the explanations proposed;

  • Stocks were overpriced. Many people believe that stocks were over-priced and the crash brought the share prices back to a normal level. However, some studies using standard measures of stock value, such as Price Earnings Ratios and Price Dividend Ratios, argue that the share prices were not too high;
  • Massive Fraud and Illegal Activity. A number of people believe that fraud and illegal activity was one of the causes of the 1929 Crash. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation;
  • Margin Buying. This is another scapegoat for the cause of the Crash. However, it is not the main reason because there was very little margin outstanding relative to the value of the market (the margin averaged less than 5.0% of the market value);
  • Federal Reserve Policy. The new President of the Federal Reserve Board Adolph Miller tightened the Monetary Policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, starting from the beginning of 1929, the interest rate charged on broker loans rose tremendously. This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non-financial and other corporation that financed brokers and dealers; and
  • Public Officials’ Repeated Statements. Many public officials commented that the stock prices were too high. For example, the newly elected President of the United States, Herbert Hoover, publicly stated that stocks were overvalued, and that speculation hurt the economy. Hoover’s statement suggested to the public the lengths he was willing to go to control the stock market.

In conclusion, stock market crashes occur at the end of an extended bull market. This is when irrational exuberance or greed drives stock prices to unsustainable levels. At that point, the prices are above the real worth of the companies as measured by earnings. The price-to-earnings ratio will be higher than historical averages. The best approach is to always exit before the free-fall begins.

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