Yesterday, October 19, 2017, was the 3oth anniversary of the Black Monday stock market crash. On that day the Dow Jones Industrial Average fell 508 points to close at 1,738.74, losing 22.61% of its value in one day. It was and remains the largest one-day decline ever. This was after losing 108.35 points, or 4.6%, the preceding trading day (Friday, October 16), and other large sell-offs in the week preceding that. It truly was a crash.
UCLA
I remember it all well. I was in my first month of my MBA program at the Anderson School of Management at UCLA. All in the program were shocked – students and professors alike. One finance professor canceled class because he was so shocked (he rallied and resumed his classes the next day). It was all anyone could talk about. One of our classmates who also had a Masters in Geology said the Mount Saint Helens eruption happened just as he started his Master’s program, and now this. What next?
The main ramification for us in the MBA program was that the investment banks curtailed their hiring. Curtailed, but not eliminated. This came to pass over time, but not immediately. A number of our classmates who originally were looking to break into investment banking suddenly became more interested in consulting and other fields. MBA students can be very resourceful and adaptable. The 1987 Crash remained a topic of conversation throughout our 2 years at UCLA.
What do you remember about Black Monday? Were you even born?
Since Then
As I write this, the Dow Jones Industrial Average is trading at 23,128, just off a new record high. That is a 9.0% compounded return since the 1,738.74 Black Monday close. If the same thing occurs for the next 30 years, the Dow will close at 306,855 on October 19, 2047, when I will be 86 years old. I hope it happens, although it will be difficult because we are starting from a higher base. Black Monday turned out to be a great buying opportunity. Buy the dips? That was a big dip.
It was a completely different world then. The big brokerage houses, the Merrill Lynches and the Paine Webbers, still dominated stock trading. It was full commission trading. Charles Schwab and other discount brokers were up and running but were still a small part of trading. The Internet barely existed – can you imagine that? It has been nothing short of a revolution in stock ownership and trading since then. The tech revolution since then has struck financial services perhaps as much or more than any other industry.
1987 vs. 2008
The 9.0% compounded return since 1987 includes the financial crisis of 2008. The Dow peaked in October 2007 at 14,000 and bottomed in March 2009 at about 6,600, which was a peak to trough drawdown of almost 53%. The 1987 Crash happened over the course of about a week, and mostly in 1 day. The 2008 crash happened over about 18 months. The 1987 Crash was substantially caused by a liquidity crisis caused by algorithmic program trading, which was a relatively new phenomenon. Parties to the program trades lost a ton of money, but the economy as a whole was only marginally affected, and so the economy quickly recovered. The 2008 Financial Crisis was caused by poor underwriting in sub-prime mortgages, and its effects were more widespread, enveloping first the entire housing and home lending industry, then the entire banking industry, and finally the entire economy. The Federal Reserve Bank reacted to the 1987 Crash by increasing liquidity, and markets stabilized due to the Fed’s actions as well as other adjustments within the markets themselves, with little long-term ramifications to the Fed. The Fed reacted to the 2008 Financial Crisis ultimately by buying bonds and increasing its own balance sheet by $4 Trillion. That’s with a T. Think about that for a minute. Those $Trillions remain substantially on the Fed’s balance sheet, although the Fed has announced it will wind down its bond holdings over time. Thus, we are still seeing the ramifications of the 2008 financial crisis today, 9 to 10 years later. Did the Fed help, or did it make the crisis worse and the recovery, therefore, more drawn out? We will never know. But, the Dow is now over 23,000. Maybe it would be over 40,000 had the Fed not intervened as much it did, or maybe it would be 13,000, but we will never know. However, the “in and out” strategy that the Fed used in 1987 led to a quick recovery from that crisis, whereas the more extensive Fed involvement since 2008 remains a drag on the economy now.