Little Has Changed 25 Years After ‘Black Monday,’ But …

by Dan Wiener | October 17, 2012 7:15 am

Friday marks the 25th anniversary of the Oct. 19, 1987, market crash — better known as “Black Monday.”

For those who can’t remember, the Dow Jones Industrial Average had hit an all-time high that year on Aug. 25. As is typical after hitting a high, the market consolidated a bit and bounced around, dropping as much as 8.4% before recovering more than half of that loss.

But, after a relatively raucous three days when the Dow shed 10.4% and then-Treasury Secretary James Baker expressed some concerns over the weekend about the market’s fall, Monday saw markets begin to tumble around the globe starting in the Far East and ending with our market dropping 508 points, or 22.6%.

Wall Street blamed Baker, program trading (a precursor to today’s high-frequency trading[1]), over-valuation and investor psychology. Many investors panicked and sold, missing the next two days’ 16.6% recovery.

As it was, the markets continued to churn but before year-end had reached a bottom and steadily gained for the next two years. In fact, the old high of Aug. 25, 1987, was finally surpassed on Aug. 24, 1989, a day less than two years later.

The more things change, the more they stay the same.

As I said, computerized trading still is with us, though the computers are faster, the trades come and go quicker, and the impact on the markets can be even more stunning in their ferocity. As for global markets declining in sync, we’re almost certainly more in tune with markets in the Far East and Europe than we’ve ever been — correlations between markets have been rising steadily over the past several years. Politicians both here and abroad still have the ability to move markets with an ill-timed or ill-spoken comment (just ask the ECB’s Mario Draghi).

But, when it comes to investor psychology, I’d say there’s a big difference: While investors were gung-ho in 1987, bidding up stock prices and nervously watching as their portfolios hit record levels, today’s investors seem almost oblivious to the market’s moves toward highs and instead have been piling into bonds[2]. Despite improving consumer confidence, investor confidence appears to remain quite low.

And that’s probably a good thing for the markets.

Daniel P. Wiener is editor of The Independent Adviser for Vanguard Investors[3].

  1. today’s high-frequency trading:
  2. have been piling into bonds:
  3. The Independent Adviser for Vanguard Investors:

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