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Black Monday: A Look Back and a Look Forward

Investments Wealth mindset Risk

by Ted Halpern

This week marks a momentous 30-year anniversary.

No, I’m not talking about the debut of the Simpsons on the Tracey Ullman show—even though to me, that is pretty significant. This Thursday, October 19, marked the 30th anniversary of Black Monday, the largest one-day stock market drop in the history of Wall Street. And on top of that, the Dow surpassed the 23,000 level this week—when just last year it seemed uncertain whether it would break 20,000.

On this anniversary, should you be scared that “what goes up must come down” in a manner similar to Black Monday? No. In this post, we’ll walk you through the quarter-end returns over the past 30 years, 20 years, and 10 years to show that these new highs aren’t anything to fear.

What Happened on Black Monday?

On Monday October 19, 1987, the blue-chip Dow Industrials index opened at 2246.74 and closed at 1738.74—a staggering price drop of -22.6%. At the time, “portfolio insurance” (shorting S&P 500 futures to offset losses), arbitrage on mergers and acquisitions, and computerized automated trading were popular strategies. All of these required traders to sell (pushing prices lower) given certain conditions. A slowing economy, falling oil prices and tensions between the U.S. and Iran were putting stress on investors as well. Of course the way all of these risks converged is apparent in hindsight, but at the time, markets had experienced a prolonged period of gains. No one expected a panic where the volume of sell orders overwhelmed the stock exchanges. The shock of Black Monday hit markets worldwide, and may have even caused an uptick in hospital admissions!

Since 1987, computerized trading has advanced to the point that high-frequency trading algorithms accounted for nearly 50% of market activity in 2016. As of the close on October 19, 2017, the DJIA was at 23,163.04, and sits on a price gain of about 16% for the year so far (the S&P is up about 7% and the Nasdaq is up 22%). And right on schedule, we’re seeing the headlines: “30 years after Black Monday, could stock market crash again?

The only problem is no one can predict when a crash will occur.  

And the market gains, while definitely positive, are not as overblown as they appear.

All the New Highs We Keep Hearing About Aren’t All That High

Looking at this data, you can see how the “most hated bull market in history” really isn’t out of the ordinary. Even through the 2001 tech bust and 2008 financial crisis, the DJIA index (which we are using as a proxy for the market) has managed to produce an average annual return of about 8%.  And even that is below the 30-year historical average. Hopefully, we can revert to the mean and return to higher performance.

(Data source: https://dqydj.com/dow-jones-return-calculator/)

It’s Actually a GOOD Time to Be an Investor

Now, we don’t mean to be overly optimistic. In fact, we are the first to critique the financial industry’s tendency to be over exuberant or overly fearful. After all, we have been a fiduciary for nearly 20 years, long before it was popular—and we know that being reactive in either direction is not a good strategy. In fact it often leads to missing out on higher performance.  Having a long-term, well-diversified, and disciplined strategy is key. New highs in the market and headlines about the bull being “long in the tooth” are not reasons to worry in and of themselves—especially when the returns have actually been well within (even a bit below) normal historical ranges.

Market corrections are completely normal and we will see many more of them over the years to come.  (2016 was a perfect example of this—a great year for markets, but we certainly did see some corrections.) What is unlikely is a major crash similar to Black Monday—those are true anomalies. But as you can see the market does manage to pick itself back up, dust itself off and move ahead – each and every time.  Optimism wins!

We can’t predict where the market will go tomorrow—or even where it will go by the end of today. But we do know from history that the one way to ensure losses is to sell in a panic—and the one way to enjoy long-term returns is to be a long-term investor. So don’t let over exuberance or undue fear dictate your behavior as an investor. We do recognize it has been a strong run for markets and valuations are getting rich.  As such, we do actively rebalance, adhere to the discipline associated with your specific investment objectives and maintain an efficient approach to investing in every way possible.

Stick to your plan and understand markets go up over time—just not always straight up.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Halpern Financial, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Halpern Financial, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Halpern Financial, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Halpern Financial, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

 

 


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