It was 25 years ago today when Wall Street suffered one its biggest market crashes in history.
On October 19, 1987, the Dow Jones industrial average (INDU) tumbled 508 points, losing more than 22% of its value and marking the second-largest percentage loss in a singly day. (The worst was when the Dow lost 24% on December 12, 1914, when the New York Stock Exchange
reopened after having been closed for most of the previous 3-1/2 months due to increased selling at the onset of World War I.)
While the selling was extremely aggressive and painful that Monday, it had begun the prior week. On October 16, 1987, the Dow lost 108 points, which back then was considered a bloodbath on Wall Street, as the Dow rarely logged triple-digit swings.
“When we left the office that Friday, we all went out and got really drunk because the day had been so horrible,” said Keith Springer, who was a rookie stock broker at Merrill Lynch at the time. Springer is now the president of Springer Financial Advisors in Sacramento, Calif.
“As it turned out, Monday was far worse,” he added. “It was the beginning of computer trading, and as we watched the screens, our assets were being cut in half. We’re desensitized to it now, but at that time, we had never seen anything like it.”
David Kotok, who had founded his firm Cumberland Advisors 14 years earlier, also remember the day vividly. As the market got slaughtered, Kotok decided to start buying.
“I remember buying a block of AT&T (T), and getting calls from my clients asking if I was crazy,” said Kotok. “I told them that we were at the climax of classic panic selling, and it was a rare opportunity. Either the world was going to end, at which point it would make no difference, or we were at a generational low.”
A few weeks later, Kotok’s clients, with the exception of the two that fired him, called again to thank him for remaining disciplined during the crash.
Following that low, stocks rebounded up until the dotcom crash in 2000. In Kotok’s opinion, the last climax of a classic panic-selling period was in March 2009, and he thinks the stock market’s rebound since then is still in its early stages.
“The market experiences crashes when central banks are tightening with the purpose of either crunching inflation or defending the currency” said Kotok. “Today, the world’s central banks are doing neither. They’re easing and stimulating to come out of the crisis. Under such circumstances, history suggests that you get upward movements in stocks [and] I think that huge moves still lie ahead.”
In fact, Kotok expects the S&P 500 (SPX) to cross 2,000 by the end of the decade, as earnings for companies in the benchmark index hit $125 a share, up from about $100 today.
While experts say an unforeseen calamity could trigger deep selling in the market that could feel a lot like Black Monday, there are a number of measures that have been put in place since then to avoid such steep drops in short periods of time.
In response to the October 1987 crash, the New York Stock Exchange instituted circuit breakers that halt trading in extreme moves. Under the rules, a 10% decline would trigger a one-hour halt, while a 20% drop would result in a two-hour halt. If the market declined by 30% in a single day, trading would be halted for the remainder of the day.
Even with circuit breakers in place, events like the May 2010 flash crash are evidence that stock market crashes can happen, and could be even worse, said Tom Schrader, managing director at Stifel Nicolaus.
“The derivative world is greatly misunderstood by a lot of people. And there’s also the threat of a significant financial shock in China or somewhere overseas,” said Schrader. “I’m not ever one to say never.”