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1987 Crash: 20th Anniversary of Black Monday

I have not been a believer in the parallels between the present market and the 1987 crash. The back drops are too different, and the impact of portfolio insurance too significant to draw a good analogy. (A Demon of Our Own Design does an excellent job explaining this).

However, today is the 20th anniversary of Black Monday and the '87 crash. The media are having an orgy of retrospectives:

Barron's (Black Monday)
WSJ (Looking Back, Persistence Is the Lesson; Exorcising Ghosts of Octobers Past)
New York Times (A Pause to Recall the 1987 Crash)
BusinessWeek (Lessons from the '87 Crash)
NYPost (TWENTY YEARS AFTER)
UK Guardian (The lessons of Black Monday).

I'm sure more are to follow.

Of all the reviews I have seen, the most interesting was this weeks Barron's cover story. Andrew Bary  managed to find the right context for explaining the relative size of the Black Monday, and what it meant to investors in terms of opportunity. 

Here's the Ubiq-cerpt:™

"IT'S FITTING THAT AS THE 20TH anniversary of the ferocious 1987 stock-market crash approaches, most major U.S. equity averages are at or near record levels, and many markets in the developing world at boiling points. – The prevailing view on Wall Street is that the monumental drop on Oct. 19, 1987, when the Dow Jones Industrial Average plunged 508 points – 22.6% -- on then-record volume, won't be repeated. There's good reason for the widespread optimism. But, then again, Wall Street seemingly is always optimistic until something goes terribly wrong. Not that the bulls don't have some good arguments. The Dow's drop on Oct. 19, 1987, was unprecedented, and hasn't come close to being equaled since then.

The largest percentage decline in the current decade was 7.1% on Sept. 17, 2001, and the biggest drop in the past two years was 3.3% on Feb. 27, 2007. Even the historic 1929 crash, while deeper, broader and longer-lasting, didn't produce a one-day downdraft as vicious as 1987 did. The Great Crash included a 12.8% one-day loss on Oct. 28, 1929, followed by an 11.7% slide the following day and one of 9.9% on Nov. 6. So, the 22.6% drop 20 years ago was truly a statistical outlier.

In fact, to the extent that Wall Street looks back at that disastrous fall day in 1987, it's probably to scoff with amazement that investors were foolish enough to dump stocks on what turned out to be one of the great buying opportunities. By the end of that year, the Dow had regained 11 percentage points of its loss. And by Dec. 31, 1988, the DJIA was almost 25% higher than it was at the end of Black Monday.

Good stuff.

Dow: Key Events, 1987 to Present.

Legend: 

1. Alan Greenspan becomes Fed chief
2. Oct.19, 1987 crash
3. Iraq invades Kuwait
4. Yahoo! IPO
5. Dow hits 11,750.
6. Sept. 11, 2001 terrorist attacks
7. Second Gulf War.
8. Ben Bernanke succeeds Greenspan

>

Source:
Black Monday
ANDREW BARY
Barron's October 15, 2007
http://online.barrons.com/article/SB119222900783957839.html

Monday, October 15, 2007 | 06:38 AM | Permalink | Comments (15) | TrackBack (1)
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Comments

We might not have a repeat of October, 1987 but we could see this top heavy market roll-over into an environment that sees troubles all around - slumping dollar,foreigners stop buying tresuries, forcing up long term interest rates; causing an even bigger problem in the housing and financial sectors. Of course we all can go on believing the the U.S. consumer is going to continue to borrow and spend, borrow and spend, and Paulson, is going to help the banks keep glossing over their responsibilities. Go ahead keep throwing good money after bad, keep making our "capital" markets less and less effective.

Posted by: Justin | Oct 15, 2007 7:56:45 AM