30-Year Anniversary of “Black Monday” – Dow Down 23%

Today is the 30th anniversary of “Black Monday,” October 19, 1987, when the Dow Jones Industrial Average plunged 508.3 points, or almost 23%, in that one day. It was and is the worst single day in US stock market history.

At today’s lofty levels, a decline of 23% in a single day would mean the Dow would lose about 5,200 points. Think about that! Could you really hold on if the Dow shed over 5,000 points in a day? Or should you?

While the vast majority of my clients are old enough to remember Black Monday, some of my readers are too young to remember what happened that day. So that’s what we’ll focus on today. Plus, we know a lot more about what caused Black Monday today than we did back then.

Above all, the question is: Could Black Monday happen again? I think the answer is… YES.

That answer may surprise you, but first let’s look at the events that led up to Black Monday. In the early to mid-1980s, the US economy was rebounding strongly from the severe recession of 1980, and US stocks moved significantly higher.

The mergers and acquisitions (M&A) market was also hot during this period, rife with leveraged buyouts (LBOs) and hostile takeovers. Regulators and lawmakers in Washington were raising concerns that such activity was getting too widespread and thus too risky – thanks in large part to leveraged positions on the part of institutions and even some retail investors.

On Tuesday, October 13, 1987, the Democrat-controlled House Ways and Means Committee (headed by Dan Rostenkowski) announced surprise legislation that was intended to curb M&A activity by placing restrictions on takeovers and repealing many tax breaks related to mergers and acquisitions. This really set the stage for Black Monday.

On Wednesday, October 14, in the wake of that unexpected legislation, stocks of takeover candidate companies and the suspected acquirers started to fall. Stocks of announced deals, as well as rumored deals, fell out of bed in the days leading up to Black Monday. Investors were spooked not only by the surprise legislation, but also by fears that interest rates were about to move higher. The yield on the 10-year Treasury Note was 10.18% on Black Monday.

On Thursday, October 15, there were calls to roll back the surprise legislation to curb M&A activity, but there was no indication that the Ways and Means Committee was flexible. On Friday October 16, many of the takeover stocks again fell sharply and there were few if any bids on them. Firms at risk sold what they could.

Then came Monday, October 19.

Overseas markets were in a panic on Monday, as they reacted to what happened on Friday. By the time US investors went to work on Monday, global markets were in very bad shape. Liquidity continued to wither, and institutional players in the equity markets continued selling what they could.

Adding to the selling pressure was mounting equity mutual fund redemptions, especially during the day on Black Monday, which added to the forced selling of stocks. The stock markets plunged dramatically. It was the “perfect storm.”

So, that’s why the stock market crashed on October 19, 1987. We had leveraged institutions and investors who were “forced” to sell to meet margin calls. We had mutual funds that were “forced” to sell to meet redemptions. Finally, we had holders of portfolio insurance who were contractually “forced” to sell to protect their portfolios. Again, it was the perfect storm.

What is important to understand is that Black Monday, October 19, 1987, was not caused by a plunge in economic growth or a financial crisis. I’ll get criticized for saying this, but the primary catalyst was an onerous surprise piece of congressional legislation aimed at restricting free market activity.

As we acknowledge the 30-year anniversary of Black Monday, let’s keep in mind that a lot has changed since then. Several new regulations have been put into place since then aimed at preventing another Black Monday – namely circuit breakers or trading curbs, etc.

Yet that does NOT mean another Black Monday, or worse, can’t happen again. In fact, many market analysts believe it’s only a matter of time.

If this worries you, I strongly suggest that you consider some of the investment strategies we recommend at Halbert Wealth Management. We have several strategies that do not depend on a rising stock market to make money. We even have strategies that do not use stocks or bonds and have very low correlation to the financial markets. Our stable of investment strategies has never been larger or more diverse.

Call us at 800-348-3601 or visit www.halbertwealth.com. My sales staff does not work on commission, so there’s never any pressure to invest. And finally, you should know that I have my own money invested with every money manager we recommend.

Sorry, comments are closed for this post.

30-Year Anniversary of “Black Monday” – Dow Down 23%

Today is the 30th anniversary of “Black Monday,” October 19, 1987, when the Dow Jones Industrial Average plunged 508.3 points, or almost 23%, in that one day. It was and is the worst single day in US stock market history.

At today’s lofty levels, a decline of 23% in a single day would mean the Dow would lose about 5,200 points. Think about that! Could you really hold on if the Dow shed over 5,000 points in a day? Or should you?

While the vast majority of my clients are old enough to remember Black Monday, some of my readers are too young to remember what happened that day. So that’s what we’ll focus on today. Plus, we know a lot more about what caused Black Monday today than we did back then.

Above all, the question is: Could Black Monday happen again? I think the answer is… YES.

That answer may surprise you, but first let’s look at the events that led up to Black Monday. In the early to mid-1980s, the US economy was rebounding strongly from the severe recession of 1980, and US stocks moved significantly higher.

The mergers and acquisitions (M&A) market was also hot during this period, rife with leveraged buyouts (LBOs) and hostile takeovers. Regulators and lawmakers in Washington were raising concerns that such activity was getting too widespread and thus too risky – thanks in large part to leveraged positions on the part of institutions and even some retail investors.

On Tuesday, October 13, 1987, the Democrat-controlled House Ways and Means Committee (headed by Dan Rostenkowski) announced surprise legislation that was intended to curb M&A activity by placing restrictions on takeovers and repealing many tax breaks related to mergers and acquisitions. This really set the stage for Black Monday.

On Wednesday, October 14, in the wake of that unexpected legislation, stocks of takeover candidate companies and the suspected acquirers started to fall. Stocks of announced deals, as well as rumored deals, fell out of bed in the days leading up to Black Monday. Investors were spooked not only by the surprise legislation, but also by fears that interest rates were about to move higher. The yield on the 10-year Treasury Note was 10.18% on Black Monday.

On Thursday, October 15, there were calls to roll back the surprise legislation to curb M&A activity, but there was no indication that the Ways and Means Committee was flexible. On Friday October 16, many of the takeover stocks again fell sharply and there were few if any bids on them. Firms at risk sold what they could.

Then came Monday, October 19.

Overseas markets were in a panic on Monday, as they reacted to what happened on Friday. By the time US investors went to work on Monday, global markets were in very bad shape. Liquidity continued to wither, and institutional players in the equity markets continued selling what they could.

Adding to the selling pressure was mounting equity mutual fund redemptions, especially during the day on Black Monday, which added to the forced selling of stocks. The stock markets plunged dramatically. It was the “perfect storm.”

So, that’s why the stock market crashed on October 19, 1987. We had leveraged institutions and investors who were “forced” to sell to meet margin calls. We had mutual funds that were “forced” to sell to meet redemptions. Finally, we had holders of portfolio insurance who were contractually “forced” to sell to protect their portfolios. Again, it was the perfect storm.

What is important to understand is that Black Monday, October 19, 1987, was not caused by a plunge in economic growth or a financial crisis. I’ll get criticized for saying this, but the primary catalyst was an onerous surprise piece of congressional legislation aimed at restricting free market activity.

As we acknowledge the 30-year anniversary of Black Monday, let’s keep in mind that a lot has changed since then. Several new regulations have been put into place since then aimed at preventing another Black Monday – namely circuit breakers or trading curbs, etc.

Yet that does NOT mean another Black Monday, or worse, can’t happen again. In fact, many market analysts believe it’s only a matter of time.

If this worries you, I strongly suggest that you consider some of the investment strategies we recommend at Halbert Wealth Management. We have several strategies that do not depend on a rising stock market to make money. We even have strategies that do not use stocks or bonds and have very low correlation to the financial markets. Our stable of investment strategies has never been larger or more diverse.

Call us at 800-348-3601 or visit www.halbertwealth.com. My sales staff does not work on commission, so there’s never any pressure to invest. And finally, you should know that I have my own money invested with every money manager we recommend.

Sorry, comments are closed for this post.