DOW Falls 3,055 Points Today
This is what the headlines would read if today we suffered from the same size correction that occurred on “Black Monday” 20 years ago today. In 1987, the US economy was suffering from rising oil prices, a nearly stagnant economy, and concerns over peace in the Middle East. All of these facts are eerily reminiscent of today’s global situation.
Following a few days of selling pressure going into the weekend, the stock market opened Monday morning October 19, 1987 and started falling. 30% of the stocks making up the Dow Jones Industrial Average didn’t start trading for an hour after the market opened because of massive sell side imbalances. Black Monday had begun, and its fall was only exacerbated by a new financial theory, market insurance, which involved computerized selling of baskets of stock based on a fall in the market. These computerized trading systems sold stocks as the market fell, triggering the system to sell yet more stock, creating a vicious cycle.
The record levels of selling processed that day swamped the financial infrastructure. Reports circulated about the market tape being, in some cases, and hour behind the actual market. Trades took hours to process, and correct information was hard to come by. This was no ordinarily dip; some people tragically took their own life.
In the days following the crash, many of America’s leading corporations announced plans to repurchase massive amounts of stock. Realizing that the markets didn’t disappear after the crash, and that the world was not reentering the Dark Ages, the market bottomed a few months later and within a few years reached new all time highs.
In response to the market crash, and the subsequent congressional investigation, new procedures and controls were put in place. Some of the most obvious are the circuit breakers, which are intended to protect the market. Essentially, if a circuit breaker is tripped, the market halts trading. This simple pause is intended to allow “cooler heads” to prevail, and give the markets time for proper information dissemination.
Circuit breakers are a good idea, but one can never be too cautious. Back then the market lost more than 20% of its value in a single day. A fall of that size would exceed 3,000 points on the Dow Jones Industrial Average today. It is scary to think about, but the circuit breakers don’t protect the investing public from a multiple day fall in the markets. Nothing is in place to protect the markets from a series of smaller, but no less substantial and painful movements. For example, nothing would happen if the market declined 5% per day for four days straight. This only reinforces our theory of using trailing stops and closely monitoring your investments.
Category: Stocks
