Reflections: 30 Years After Black Monday
Colorado financial experts weigh in on the impacts of this market event
Though it was 30 years ago today, to many Black Monday remains ironed in their memories as though it was only yesterday. On October 19, 1987 the Dow Jones Industrial Average dropped 508 points, roughly 22.6 percent of its value at the time.
Financial experts said portfolio insurance was responsible for the event. At the time, this was a quantitative tool that used futures contracts to guard against market losses. Unfortunately, this was not the case.
In the three decades since, global markets have recovered only to fall again in unpredictable cycles.
Despite the devastation of the event, today's market is reliant on computers for quantitative algorithms that select stocks, mitigate risk, trade, bet on volatility and more.
In the years since 1987 we have come a long way toward understanding what drives stock performance and how to apply it to our portfolios.
We got a handful of perspectives from Colorado-based financial advisors and experts on what they remember of Black Monday, what they learned and what might seem eerily similar today.
“Looking back on 30 years ago to that day, October 19, 1987, it was truly terrifying if you were working in financial services. I was only 26 at the time and was trading municipal bonds for the investment banking powerhouse Boettcher & Company in Denver.
That day is seared into my memory for so many reasons, but mostly because of the advice I received that night from my father, Moses Taylor, who was an investment advisor for a firm on Wall Street.
It was a surreal experience watching stocks drop that fast on the Quotron machine. There were no buyers that day. Individuals stocks dropped 20 to 30 points and by the end of the day the DOW was down 508 points or 22 percent. No one alive had every experienced anything like it.
Back in 1987, the stock market crash was primarily caused by rising interest rates during the year, an overvaluation of stock prices and program trading.
The advice my father gave me that night was:
“Never panic in a crisis and don’t sell. The market will eventually come back.”
Those words of wisdom have served me and our Northstar clients very well over the past 33 years that I have worked in the securities business.
Over the past three decades there have been many stock market corrections and two significant bear markets, the worst being the financial crisis of 2008-2009. To me that crisis ... was far worse than the stock market crash of 1987 because there was no liquidity in the bond market, which exacerbated the selloff in stocks.
Today, one could argue the markets are also overvalued, and there is too much money going into passive investments like index funds and exchange traded funds. The Federal Reserve has also signaled they will continue raising short term interest rates in December and three more times in 2018. So there are a few similarities to 30 years ago.
However, bull markets usually die because of a recession, not old age. Currently corporate profits are improving, unemployment is extremely low and global economies are finally benefiting from all the quantitative easing over the past nine years. So a recession doesn’t appear imminent.
Words of Wisdom
There’s a Warren Buffet quote I always use, it applies to so many things:
“Only when the tide goes out do you discover who’s been swimming naked.”
It exposes investors that are not appropriately diversified and don’t have their money in the right places. That can obviously apply to ’87. If the market goes down, and it will at some point, investors always get exposed.
If you don’t remember the 1987 crisis, think back to the 2008 crash. If you are uncomfortable with a sizeable drop in your portfolio, you’ve probably put yourself into too risky of a position.
- Assess your risk tolerance.
- Keep calm and tune out the noise: Economic developments often take time to play out in the wake of a crisis event. Avoid making kneejerk changes to your portfolio and remember to reevaluate your overall allocation
- Risk management for your portfolio: Avoid the temptation to “time” the markets. Rather, adopt an asset allocation, which is consistent with your need for return and risk.
- Cope with uncertainty
Economic and political influences are ever present and will undoubtedly continue to create market risks. We must remain watchful; heightened instability both domestically and abroad may require adjustments to portfolio asset allocations. But we must also be diligent in our efforts to make sound, thoughtful investment decisions. Ultimately, the health of an investment portfolio depends on one’s ability to take reactionary emotions out of investing.
JOHN N. ROBERTS, PARTNER + PORTFOLIO MANAGER, DENVER INVESTMENTS
Could the same thing happen? It’s not a perfect analogy, but could your car break the way your bike did when you were a kid. The markets are more like a car today, than a bike.
Market volatility has been muted. As of September, we have had 11 straight months of consecutive gains; that’s more than anytime since 1959 ... we’re starting to see inflation pick back up, and wages pick up. There are no employees to be had out there.
WALLY OBERMEYER, GEORGE WOOD, OBERMEYER WOOD INVESTMENT COUNSEL
WOOD: I had been in business for five years, independently. It was a trying day. The Fed came out and said Monday they would be there; they took the panic out of the market. People were scarred by it.
OBERMEYER: When I think about it and during other market disruptions, you should always keep enough money on the side, sufficient funds to satisfy your normal needs in life. Keep longer-term funds in the stock market. Warren Buffet said: In the short-term, the market is a voting machine; in the long-run it’s a weighing machine.
WOOD: Know what you own and why you own it.