A Black Monday Redux?

Contributed by Lewis J. Walker, CFP®

The headline startled: "Dow plummets...on a wave of panic selling; 22% drop exceeds worst day in 1929." The date was Tuesday, October 20, 1987, and the front-page above-the-fold story in the Minneapolis-St. Paul Star Tribune chronicled the carnage on Wall Street on what became known as Black Monday.

My #2 strength on Gallup Strength Finder is "input." I collect things, namely ideas, quotes, journals of historical interest. The other day while going through old files bound for a shredder, I came across a yellowed copy of a 30 year old newspaper I had saved thinking that lessons could be learned from what might be a piece of history.

The paper called it "a downer of historic proportions." Editors compared "10 days in October," showing losses in the benchmark Dow Jones Industrial Average (Dow) of 34.14% over 10 trading days from October 5-19, 1987, versus minus 28.96% October 19-29, 1929, leading into the Great Depression. The "psychological effect could be most harmful," warned the paper.

The index fell -22.6% that fateful Monday. On Monday, September 25, 2017, the Dow opened at 22,320.47. If it had dropped that day by the same percentage, the decline would have been a heart-thumping 5,044.43 points. How would you have reacted to that? How would plans to buy a house, pay for college or other educational needs, retire, or enjoy life if already retired, be impacted? If you were a closely-held business owner, how would the drop influence your business? Would expansion plans go on hold? Employees laid off? Debt service strained if revenues contract as customers retrench?

With key indexes at or above all-time highs, your ability to withstand a market jolt is worth examining. Depending on your age, you may not even remember Black Monday of 1987. You do remember the market crash of 2008. A bull market heals psychological wounds and anxieties...until it doesn't. Looking at a headline like the one of that fateful Tuesday morning, what might your reaction be when and if it happens again, at some magnitude?

For those working and who do not depend on savings and investments to run your life, market declines are your friend, allowing you to buy stock at bargain levels. If you continue to invest through a 401(k) or other retirement plan, you know dollar-cost-averaging works. But if you are retired and have to pull money out at the depths of a decline to run your life, that's a form of "dollar-cost-ravaging," as that money is not available to grow back.

It took two years for the Dow to get back even with where it was before the Ides of October 1987. Would you have had enough cash or alternative sources of income to avoid selling stocks, the gift of time and patience to let your equity portfolio recover? For retirees we counsel safe money buckets, FDIC-guaranteed cash and other low volatility asset "buckets" that can provide a "paycheck fund" so you can ride out the storm.

The Los Angeles Times opined, the "economy (is) far stronger that it was during the October '29 debacle." Our economy today also seems to be in relatively good shape. But a bear market interlude can come out of nowhere for a variety of reasons not tied to the economy. A new book, A First-Class Catastrophe by Diana Henriques, dissects "the road to Black Monday." "A handful of large institutions were dominating trading...and directing the course of markets, especially when they acted in unison." (See book review, The Wall Street Journal, 9/19/17). Using what Ms. Henriques calls "trading toys," program trading, index arbitrage, and futures contracts, the Wall Street herd headed for the exits at the same time and Mom and Pop Main Street got trampled. As more and more money pours into major index funds, forcing valuations ever upward on the big capitalization stocks that dominate the index, and with the big boys still at it with high frequency trading, what might the next stampede look like?

The same paper also headlined, "U.S. attacks Iranian oil platforms." "Attack is preview of U.S. military power in the gulf." Another story noted that "Indian troops reach center of Sri Lanka rebels' town." Then they were "rebels." Now chaos spreaders are called "terrorists." History does repeat. It may even rhyme.

BTW, the Star Tribune of 9/20/87 had ads offering help to pay for college averaging $10,000 a year, a one-year CD at 8.20%, two prime rib dinners for $12.95, and flights from Minneapolis to Los Angeles for $49.50 roundtrip. Ahhh, the good old days!


Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-3553.  Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of  SFA which is otherwise unaffiliated with Capital Insight Group. Lewis is a Gallup Certified Strengths Coach.

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