1973 74 stock market crash

1. 1973-74 STOCK
MARKET CRASH
761- Mahesh Parmar
762- Dipakkumar Patel
763- Nilesh Pathak
764- Pratik Samria
765- Rishikesh Sawant
766- Akshay Shah
767-Tejas Shah
768- Munaf Shaikh
769- Geet Sharma

2. WHAT LEAD TO STOCK MARKET CRASH
IN 1973-74?
The crash came after the collapse of the BrettonWoods system over the previous
two years, with the associated 'Nixon Shock' andUnited States dollar devaluation
under the Smithsonian Agreement. It was compounded by the outbreak of the 1973
oil crisis in October of that year.
As good as gold
BrettonWoods established a system of payments based on the dollar,
which defined all currencies in relation to the dollar, itself convertible into gold,
and above all, "as good as gold" for trade. U.S. currency was now effectively the
world currency, the standard to which every other currency was pegged.

3. NIXON SHOCK
• Nixon Shock is a phrase used to describe the aftereffect of a set of economic policies touted
by former President Richard Nixon in 1971. Most notably, the policies eventually led to the
collapse of the BrettonWoods system of fixed exchange rates that went into effect after
WorldWar II.
• The Nixon Shock was an economic policy shift undertaken by President Nixon to prioritize
the United States' economic growth in terms of jobs and exchange rate stability.
• The Nixon Shock effectively led to the end of the BrettonWoods Agreement and the
convertibility of U.S. dollars into gold.
• The Nixon Shock was the catalyst for the stagflation of the 1970s as the U.S. dollar
devalued.

4. INVESTORS
– PRIOR TO
UK MARKET
CRASH 1972
• Investors didn’t really know how to benchmark
their investment performance correctly.
• They ignored dividends when calculating
performance comparisons.
• Compared everything — even bonds — to the
DowJones.
• Really had no idea whether or not their money
managers were any good or not.

5. THE START
OF
DOWNFALL
• The UK gives up defending sterling’s peg to the dollar in
the face of a widening trade deficit and draining currency
reserves.
• The pound begins a new life as a free-floating currency
and heads down.
• Inflation and the Bank of England’s (BOE) Bank Rate
creep up.
• After a summer rally, the market heads into correction
territory in September. It’s down more than 10% since
May 72.
• Meanwhile, there’s trouble brewing in the commercial
property sector.

6. THE UK’S
WORST
STOCK
MARKET
CRASH:
1972-1974
MARKET INDEX – LONDON STOCK EXCHANGE
1972-74

7. SITUATION WORSEN –
UK STOCK MARKET CRASH
The UK’s trade deficit expanded in
1973 to -2.2% of GDP.
1973
Inflation (9.4% CPI) and interest
rates (9.2% Bank Rate) continued
rising through 1973 as the Bank
tried to dampen the
overstimulated economy
1973
Finally we hit bear country in
August – down 22% over the 15
months since May ’72.
August
UK had already tipped into
recession whenThe Arab-Israeli
Yom Kippur War began and ended
in October.
October
The oil price was to quadruple by
March 1974, deepening the global
recession.
Mar. 1974

8. BIAS
BEFORE
THE
CRASH
Before the fall, Institutional and individual investors
didn’t really know how to benchmark their investment
performance correctly.
They innocently turned over their money to bank trust
departments and insurance companies.
Money managers often looked just at the price change
for the industrial average, ignoring the dividends which
historically have accounted for almost half of the
market’s total return.
Investors had no idea whether or not their money
managers were any good or not.

9. HEURISTICS, BIAS AFTER THE CRASH
Investors kept closer
tabs on their portfolio
managers by comparing
each manager’s
performance with a
benchmark.
01
Some investors chose
‘Index funds’ as an
investment option that
removed the manager
from the decision
making.
02
Thus it hampered the
business of Money
managers.
03

10. AFTERMATH
1973–1974
STOCK CRASH
o 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.
o In all cases, the recovery was a slow
process. Although West Germany'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.
o 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.
10

11. EFFECTS ON ECONOMY AND PUBLIC 11
A stock market crash transmitting an
independent shock to the economy.
Further it critically depends on two
factors:
First, the initial condition of the financial
system is important. If the financial
system is weak, being highly leveraged
or having experienced cumulative
shocks, it is more likely that a crash will
induce lenders to raise rates to higher
risk borrowers relative to low risk ones
and produce financial instability.

12. EFFECTS ON ECONOMY AND PUBLIC 12
Secondly, given that a shock transmitted
from the stock market crash promotes
financial instability, how the monetary
authorities react is critical.They can
ignore the shock, in which case interest
rate spreads will rise sharply, or they can
inject liquidity into the system and
dampen its effects.
Lastly, it should be added that the more
rapid and violent the crash, the more
likely it will be a surprise; and
intermediaries will have less time to
make adjustments other than altering
the terms of credit.

13. HOW TO GET AWAY FROM THE SCAM
Safeguards to be put in place to prevent
crashes due to panicked stockholders selling
their assets. Such safeguards
include trading curbs, or circuit breakers,
which prevent any trade activity
whatsoever for a certain period of time
following a sharp decline in stock prices, in
hopes of stabilizing the market and
preventing it from falling further.
Markets can also be stabilized by large
entities purchasing massive quantities of
stocks, essentially setting an example for
individual traders and curbing panic selling.
However, these methods are not only
unproven, they may not be effective.

14. 1973-1974 PREVENTION OF SCAM
Even if stocks were due for a
downturn, a more aggressive
tightening of monetary supply by
the Fed could have deflated
the market and perhaps helped
avoid the crash.
01
They could have paid much more
attention to those areas of the
world that could provide stable and
alternative oil and gas supplies
such as Nigeria and Indonesia.
02

15. THANK YOU