A Deep Breath Before the Long Drop

Investors breathed a sigh of relief on this day in 1929. The Dow Jones Industrial Average (INDEX: ^DJI) staged a strong recovery rally after two days of losses following an all-time market high. The declines, which began after notable statistician Roger Babson predicted that "sooner or later a crash is coming," were to mark the beginning of the deepest bear market the Dow has ever seen. The timing of his call would transform the "Babson Break" into Wall Street legend.

Street insiders took the rebound as an opportunity to belittle Babson's bearishness. One investment trust manager told The New York Times that the prices of "good" stocks would be higher than ever at the start of 1930. This unnamed manager voiced confidence in his trust's basket of railroads, utilities, industrial manufacturers, and banks. Others clucked that a temporary drop was to be expected, but the vast majority of investors the Times surveyed expected the Dow to end higher in six months, based on "continued prosperity."

On Sept. 6, 1929, despite two days of steep declines, Wall Street's brokers took out another $137 million in loans to buy stocks on margin, which would equal $1.8 billion today. Total loans outstanding exceeded $8 billion after the day's borrowing -- a monstrous sum at the time.

The broad rally on that day very nearly eliminated the previous day's losses. Radio Corporation, later RCA, gained nearly 10%, and General Motors (NYS: GM) gained nearly 9%. Both high-tech market leaders set new highs on the rebound. The surge was at least partly the result of the two companies' new sales partnership, which allowed GM to offer Radio Corp's radiolas and victrolas in its retail locations throughout the world. Golly gee whiz, isn't that just the cat's pajamas?

Allied Chemical, which had recently established itself as a leading global ammonia producer, gained nearly 4%. After a series of mergers, it is now part of industrial conglomerate Honeywell (NYS: HON) .

Major national retailers Tobacco Products Corporation and the United Cigar Stores Company completed a merger today in 1929, forming the United Stores Corporation. Though its chain of mergers, breakups, sales, splits, and holding corporation changes became somewhat dizzying over time, this merged company was in fact an important corporate root of tobacco giant Philip Morris, now Altria (NYS: MO) .

The U.S. Attorney General also shut down a pump-and-dump newsletter on this day in 1929. The owner was charged with mail fraud for running -- and I quote The New York Times on this -- a "financial speakeasy."

The gains of Sept. 6, 1929 wouldn't last. Stay tuned for more history of the Crash of 1929, as well as other notable events in the long history of the Dow Jones Industrial Average. If you're looking for retail stocks that can adapt to changing times like Altria, the Fool has three suggestions. Get the inside scoop on these great long-term opportunities in our brand-new exclusive free report.

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