fbpx

The Worst Day Ever

Last Monday marked the worst single-day decline on record for US Stocks as the S&P500 fell 20.5% and the Dow fell over 22%. The date was October 19th, 1987

If you were alive or old enough to remember things at the time, you remember the 1987 crash.  In the case of the Dow, it wasn’t the worst single-day decline on record as the index dropped more than 23% on 12/12/1914, but the caveat here is that the 1914 decline came after a nearly five-month stretch where the stock market was closed due to World War I.  In 1987, the only closure the crash followed was a two-day weekend.

While the crash of 1987 surprised most investors, it wasn’t as though the weakness came out of the blue.  In the two months leading up to the crash, the S&P500 was already under significant pressure leading up to that day.  For example, from the closing high on 25/8/1987 through the close on the Friday before the crash, the S&P 500 was already down over 16%.

With the market already down 16% heading into the Monday crash, you wouldn’t have faulted an investor for thinking the sell-off was overdone and putting some money to work right before.  As the saying goes, buy low and sell high, right?  While that approach may have sounded good in theory, in practice it was a disaster.  It didn’t take long before that initial investment was already down over 20%, putting the investor in what would have seemed like an insurmountable hole.

Picking up a copy of the New York Times on 20/10/1987 (the day after the crash) would have only reinforced that sentiment.  While they are more frequent now, headlines that spanned the entire front page used to be extremely rare, but the day after the crash, that’s exactly what we saw, including one headline which read “Does 1987 Equal 1929?”

While the New York Times deemed the crash of 1987 as an event worthy of the entire front page, the Wall Street Journal took a more reserved approach dedicating just two columns to its main headline, and explaining that in reference to the question “A Repeat of ’29?” that a “Depression in ’87 Is Not Expected.”

With the benefit of hindsight, while you may not have faulted an investor for cutting their losses the day after the crash, it was entirely the WRONG move as Black Monday essentially marked the low of that bear market. The ’87 crash obviously looked disastrous on a short-term intraday chart of the S&P 500 from 1987, but from a longer-term perspective, it looks a lot less intimidating. The chart below shows the S&P 500 on a log-scale going back to 1987, and from this perspective, the 1987 crash now looks like a minor blip.

It is not uncommon to find bear markets end on an extremely violent down day. That is usually a good time to buy and when you put things into a time perspective, as you can see from the above, even terrible events look minor.

The lesson we can all learn from Black Monday is to not panic and sell but rather to buy when markets fall, and to remember that stock investing is a long term prospect and even big short term moves will look small eventually.


Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.