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Black Monday October 19, 1987
Author: from the Advisors Access 401(k) quarterly newsletter with permission.
Of all the pithy sayings that have evolved about investing over the years, perhaps none are truer than that one. Stocks historically trudge along on their inexorable upward climb despite the occasional setbacks and incessant negativity of the media. It is easy enough to see in retrospect, of course. The challenging part is believing it going forward.
We believe this is the greatest challenge that all investors face - finding the fortitude to keep the faith despite all the potential landmines that seem to line the road ahead.
As we move into the latter part of 2012, Americans of all political persuasions are staring at a momentous Wall of Worry. From the outcome of the U.S. election to the pending "fiscal cliff" set to take effect in January to rising tensions in the Middle East, there
is indeed much for investors to fret about.
In searching for perspective about these events, perhaps it is better to look backward than forward and contemplate the 25th anniversary this month of what is known today as "Black Monday" - October 19, 1987. It was the day the stock market inexplicably dropped 23% in a single trading session.
Much like the "Flash Crash" of May 2010, Black Monday came seemingly out of nowhere and was largely attributed to the role of program traders in the market. But Black Monday's decline was more than double the decline of the Flash Crash, and the market in 1987 did not quickly recover as it did in 2010. The result was a much bigger emotional scar on the psyche of the investing public.
To understand the extent of the fear that pervaded the marketthat day, consider this: The VIX index, which measures volatility in the market, is considered to be in "anxiety territory" when it reaches a level of 30. During the peak of the market panic in October 2008, the VIX topped out at a reading of 80. Though the
VIX didn't exist in 1987, statisticians have reverse-engineered it and found that it would have reached a level of 170 on Black Monday - more than twice the peak of the 2008 Financial Crisis! Black Monday wasn't just a bad day for the market, the media told us then. It was a "game changer," the end of the stock market as we knew it. Investing in stocks was no longer a smart bet, we were told. Black Monday left the Dow at a level of 1738. And while the Dow eventually regained its lost ground two years later, the 1991 recession knocked the index down again and it would be a full five years before the market was able to retake and hold it's precrash high of 2246.
And that, by the way, is the perspective.
Did you miss it? Here it is again:
"...it's pre-crash high of 2246."
Despite all of the anxiety, speculating, hand wringing and stomach churning wrought by Black Monday, the Dow today, a quarter-century later, stands at a level of about 13,500 - more
than 600% above the pre-crash levels of 1987.
Just like the bursting of the dot.com bubble, 9/11, the Great Recession, and the myriad other challenges we have faced in the past 25 years, all an investor had to do to survive Black Monday was to be well diversified, stay invested, and keep the faith. For all the complicated trading strategies that Wall Street has ginned up since 1987, this is the only investment strategy that, given time, has always been successful.
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