Panic selling, Kennedy slide, & the missing cause behind it
Published on: 16 February 2025
1929 marked a terrible phase in the USA.
It was the start of the Great Depression.
There have been many recessions in the US since then. But there have been no depressions in the US since.
It lasted about 10 years.
The markets were down and remained there. Fortunes were wiped out and lost. Jobs were few.
The country did finally come out of the Depression in 1939.
And then the Second World War started.
It kept the entire country on alert. Factories were producing items for the war.
The war finally ended in 1945. Soldiers started returning home.
And with that, started a massive economic boom in the country.
Post WW2
After the Second World War, new companies were being created.
Existing companies were increasing their capacities.
It had a cyclic effect.
The economy improved, more jobs were created, and more profit was earned.
The stock markets followed – up.
They gave stellar returns to investors – right after very turbulent times.
But the past was not forgotten. Memories of the Great Depression and the World War loomed on people’s heads.
Kennedy Slide
The famous US President, John F Kennedy took office in 1961.
He took control of a country with a rapidly expanding economy.
Kennedy promised that the economy would continue to grow the same way.
In December 1961, the markets turned downwards — and continued falling.
Investors did not know what was causing this fall. There were theories. But nobody could prove any theory. It was all very confusing.
About 6 months later, the markets continued to fall. It was down by over 22%.
Kennedy was advised to address the country and explain its economic condition. He was under pressure to take some action.
He refused to do that.
After about 6 months of falls, some major investors announced that they felt stocks had reached attractive levels – and that they would start buying.
This instilled confidence in many other investors.
And that stopped the fall.
The markets began to rise again.
These 6 months were called the ‘Kennedy Slide’ or the ‘Flash Crash of 1962’.
Investigation
The SEC (Securities and Exchange Commission) feared some malpractice. They started investing this matter to reach the bottom of it.
This suspicion was valid.
In 1929, when the Great Depression started, cases of pump-and-dump, insider trading, and market manipulation were fairly common.
The Great Depression was fresh in the minds of investors. The cases were also fresh in the minds of the SEC officers.
They started their investigation.
After investigating, they presented their report.
It was not very dramatic. It could even be called dull.
They did not find any case of malpractice. There was no evidence of anyone having manipulated the markets.
According to them, the crash had been caused by a number of complex cause-and-effect factors. But there was no one clear cause.
Further, they stated that the sell-off could have been due to logical and emotional reasons.
This seemed valid.
If you have seen nearly a decade of depression, logically and emotionally, it made sense to play it safe.
No clear reason came out.
But the markets had panicked.
And they recovered when they were confident again.
In the markets, there have been many crashes like this.
Crashes
15 months later, the markets touched all-time highs.
Some have lasted for as short a period as 1 day. Some have lasted weeks, months, and even years.
Nobody can tell when the markets will crash, and the duration for which a crash will last.
This is why trying to find the bottom of a crash is mostly a useless exercise.
It is nearly impossible to tell when a crash will stop – just like it is impossible to tell when a crash will start.
Not trying to catch this point is a better strategy for most investors.
Selling when the markets are down, and starting to buy when they have already climbed up – is a bad strategy.
Selling because others are selling, and buying because others are buying only leads to below-average returns.
Of course, this does not mean that investors should start buying when others are selling.
Or the opposite.
What the Kennedy Slide teaches us is that investors panic. As a result of that, they do silly things – like selling just because others are selling.
If there are solid fundamental reasons for selling, that’s not a bad strategy.
The same goes for buying.
The images above were generated using AI tools.
Quick Takes
+India’s annual wholesale inflation rate fell to 2.31% in Jan (vs 2.37% in Dec). Inflation rose in manufacturing and apparel, and it fell for food and primary articles. Fuel and power prices fell at a slower rate annually.
+India’s forex reserves rose by $7.6 billion to $638.2 billion in the week that ended on 7 Feb.
+The UK’s GDP growth rate rose to 1.5% in December (vs 1.1% in November). It is the highest growth rate since Oct 2022 (1.7%).
+India’s annual inflation rate fell to 4.31% in Jan (vs 5.22% in Dec 2024).
+The USA’s inflation rate rose to 3% in Jan (vs 2.9% in Dec). Core inflation (excludes food and fuel) rose to 3.3% (vs 3.2%).
+India’s industrial production rose 3.2% year-on-year in Dec (vs 5% in Nov). Manufacturing rose 3% (vs 5.5%), electricity rose 6.2% (vs 4.4%), and mining rose 2.6% (vs 1.9%): MoSPI.
+Net investment in equity mutual funds rose 82% year-on-year to Rs 39,688 crore in Jan (vs 41,156 crore in Dec). Investment in debt funds rose 68% to Rs 1.28 lakh crore (vs an outflow of Rs 1.27 lakh crore in Dec): AMFI.
+SIP investments by value fell marginally to Rs 26,400 crore in Jan (vs Rs 26,459 crore in Dec). Total value of SIPs fell to 13.20 lakh crore in Jan (vs 13.63 lakh crore in Dec): AMFI.
+US President Donald Trump has put a 25% tariff on all steel and aluminium imports.
+India’s smartphone market grew 4% year-on-year to a sale of around 15 crore units in 2024. Vivo became number 1 in market share (16.6%), replacing Samsung. Samsung had 13.2%, followed by OPPO at 12%, Xiaomi at 12%, and Realme at 11% market share.
6-Day-Course
Theme of the week: numbers to check in IPO
We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper!
Question 1:
Price to earnings (or PE) ratio tells if the company’s share price is ______________.
-Fairly valued
-Over valued
-Under valued
-All of the above
Question 2:
In an IPO, if the all shares offered are pre-owned by the company’s promoters, then the IPO is said to have ____________.
-Only fresh issue
-Fresh issue and offer-for-sale
-Only offer-for-sale
Question 3:
A company that only has fresh issue shares in its IPO is always a better investment.
-True
-False
Question 4:
Looking at an IPO’s subscription pattern, we can know its perception among institutional investors.
-True
-False
Question 5:
PE ratio is the most important ratio while deciding to invest in an IPO.
-True
-False
Answers:
Q1: All of the above
Q2: Only offer-for-sale
Q3: False
Q4: True
Q5: False
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest