Markets priced for terrific outcomes will ultimately suffer a correction if commonplace follows. That’s the best way to explain the more than 20% single-day selloff in the S&P 500 that happened 29 years ago today. It was a day infamously known as “Black Monday.”
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Stock Market 1985-1987
A few years detached from a bottomless recession was medicine enough to rouse a decade’s long equity-market slumber. By the mid 1980’s the S&P 500 was like a sunset that failed to quit. It started slow and small and uncertain – corporate raiding, a faltering U.S. dollar, and a burgeoning trade deficit – caused a slight and fleeting bruising of red – only to be overtaken by layered extensions of increased globalization, invasive technology, and new-fangled market hedging mechanisms. The “Go-Go 80’s” was an infectious time - tainting investors with an “it’s different this time mentality” – covering us under a canopy of everlasting opportunity and never-ending riches.
By the Summer Solace of 1987, the Dow Jones Industrial Average (DJIA) had rallied 40%, not to mention the stunning back-to-back returns of 1985 & 1986. Yet, we were all equally clueless.
Traders and bankers and investors were all on a burning deck and no one knew it. I think back at the dumbbell market culture of the day that turned the golden ethics of thrift, frugality and concepts such as working hard today to bring profit tomorrow completely on its head. Like turkeys in November we had not a notion of what was coming.
Declines in the U.S. dollar, a growing federal debt, and an expanding trade deficit persisted as daily headlines – they were now positioned well below the crease of the newspaper as the shock value had long since gone. Consensus was callous and that callousness lit the fuse.
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On Wednesday October 14, markets began to falter ever so slightly and eventually snowballed into an unprecedented loss on Friday October 16 when the Dow dropped 4.5%. On Monday October 19, 1987 the markets changed forever. It was one-day – a -22.6% decline on the Dow – in which investors and traders could see a crisis spread live from country to country and from market to market. There has never since been a day where so many people acted in such synchronization – in such psychological closeness.
As one who lived through “Black Monday” and has spent decades trading financial derivatives and getting to see the subtleties of the financial markets from very intimate quarters, I know that the real challenge is that either we cannot measure the probability or timing of an event or, more importantly, how big the impact will be on the market. Market history is full of crashes and disorders, and financial experts are an ever-flowing source of opinion on what would make you richer and financially safer.
Accept that “Black Mondays” will one day come again. Embrace your severe limitation at forecasting the next event and instead prepare for such with appropriate and proven investing insurance strategies.