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.