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What We Can Learn from Stock Market Crash of ’87

Last Updated September 23, 2020 1:11 PM
Gerelyn Terzo
Last Updated September 23, 2020 1:11 PM

It’s been more than three decades since the bottom fell out in the stock market in 1987, and one thing remains clear – the more things change, the more they stay the same.

On Oct. 19, 1987, the Dow Jones index plummeted more than 22%, marking the worst single-day performance in the New York Stock Exchange’s history, including the start of the Great Depression, and earning the nickname Black Monday. These days, the global economy is suffering from what Wall Street veteran Ray Dalio describes as a “great sag.”  While the stock market faces headwinds that have made volatility the new normal, it’s hard to imagine an imminent collapse, the likes of which we haven’t seen either since the eighties or the Great Recession. That doesn’t mean that people aren’t worried and there aren’t lessons to glean from the stock market crash of ’87.

What’s Changed?

Many things have changed since the crash, not the least of which is the trend of globalization, which was just a glimmer in the eye of economists back then. Meanwhile, Janus Henderson Investors Director of Research Carmel Corbett Wellso recently described how the globalization tied has turned amid the U.S./China trade war :

“It may be the end of globalization, but regional economies will be fine.”

One of the obvious changes since the 1987 stock market crash is that stock prices are no longer quoted as fractions after the SEC-mandated switch to decimals in 2001. At the time, stocks such as Teledyne, CBS, IBM, and Kodak  saw their shares slashed by 49 3/4, 42 1/8, 31, and 27 1/4, respectively.  Each of those stocks is still trading today and lived to tell about Black Monday.

Another big change since the stock market crash of ’87 is the number of traders on the floor of the NYSE. Since the rise of electronic trading , there are only a few dozen brokerage firms represented vs. hundreds of firms and thousands of traders that flooded the floor back then.

What’s Stayed the Same?

Basically, if you listen close enough, you will hear the two themes woven into the fabric of the stock market then and now — buying the dip and the Fed. Whether or not investors would buy the dip was a question that was soon answered in 1987, after stocks recouped more than half of their losses in a pair of trading sessions. By 1989, the stock market would be trading higher than pre-crash levels.

Despite a rocky October, investors have proven to buy the dips in 2019, with the S&P 500 up a solid 20% year-to-date. Before the crash of ’87, stocks were said to be trading in a bubble , which is a similar theme that trickles into analysis today.

The stock market crash of ’87 was just that – a collapse in the shares of publicly traded companies. It was not considered a systemic risk to the broader economy. In fact, some argue it was then that the Fed gained its reputation as a stock market superhero for instilling confidence in investors who were otherwise rightly spooked. A report in Federal Reserve History quotes economist and former Fed Vice Chairman  Donald Kohn  as saying:

“Unlike previous financial crises, the 1987 stock market decline was not associated with a deposit run or any other problem in the banking sector” (Kohn 2006). On the other hand, some argue that the Fed’s response set a precedent that had the potential to exacerbate moral hazard.”

No wonder President Trump is expecting so much hand-holding from Fed officials. The Fed shouldn’t move markets too much this week, considering that monetary policymakers are in a quiet period with the media before next week’s highly anticipated FOMC meeting.