Can you tell which graph is the stock market crash in 1987 and which is the 2020 March Madness due to the Coronavirus?
If it helps, here is what Black Monday and the bear market of 1987 looks like over time.
Does that provide any assistance in distinguishing between the two?
You cannot help but wonder what the 2020 March Madness decline will look like in the future. Will it look like a big ugly scar going down the chart of the S&P 500 or will it morph into a tiny bump along the way to what I consider superior historic returns for long term investors in equities.
I worked directly across the street of the New York Stock Exchange on October 19, 1987. As a young man in our glorious profession, I was glued to my Bunker Ramo (the Stone Age version of a Bloomberg terminal) as the stock market tumbled down. I remember not being able to move. I was paralyzed with my eyes glued to that terminal for hours as the market ultimately closed down over 20% on that extraordinary day.
The enormity of this day was beyond comprehension. Immediately, parallels to the 1929 crash were made. Afraid of a Great Depression style run on the banks, a broker in my office actually made a withdrawal of all of his money from his bank. He later told me he had over $20,000 hidden in different parts of his clothing as he rode the New York City subway to his home in Brooklyn.
What is interesting is that no single cause has been identified for this market crash. Theories such as computer trading, overvaluation of the market, and trade/budget deficits have been identified, but no one can agree on any of them.
Nobel-prize winning economist Robert J. Shiller surveyed 605 individual investors and 284 institutional investors immediately after the crash in an effort to understand what they were thinking and what they were experiencing at the time.
It seems that the selling was not based on eroding fundamentals but primarily fear. Shiller found that the most common response at that time was a "gut feeling" of an impending crash, perhaps brought on by "too much indebtedness".
Similar to our current market which hit a brand new high on February 19 of this year, the 1987 economy seemed to be in decent shape, albeit, with slowing economic growth; but growth nevertheless.
Similar to our 2020 March Madness, the 1987 crash lost a great deal of value over a short period.
Similar to today, the Federal Reserve dropped interest rates and provided liquidity to the markets in an effort to prevent defaults. In a statement on October 20, 1987, Fed Chairman Alan Greenspan said, “The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”. As a result, the impact on the U.S. economy was relatively limited and short-lived.
From the market high in August of 1987 through the market low in December of 1987, investors recovered all their losses in 1.6 years.
Now of course, past performance is never an indication of future results and no two markets are ever alike. Also, a pandemic driven market has no parallels.
However, our current market was also coming off of a high and the economy was also generally in good shape. As our market deteriorated in March, we have had a strong response from the Fed while Washington has created a backstop by giving cash to individuals, small business, and large corporations.
The key is the virus and how long it will take to “flatten the curve’ and get our economy rolling again. If medicine and time bring our economy back on track relatively soon, this market downturn may very closely resemble 1987.
And here are the graphs labelled for 1987 and 2020.
All illustrations are hypothetical and show the growth of $1000 based off of total return of the S&P 500 from 10/19/1977 until 10/19/1987
Bloomberg and Dunham
These graphs are a representation of the S&P 500 including dividends. The S&P 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 Index components and their weightings are determined by S&P Dow Jones Indices. It differs from other U.S. stock market indices, such as the Dow Jones Industrial Average or the Nasdaq Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. You cannot invest directly in an index. All examples are hypothetical and are for illustrative purposes only. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The solution for an investor depends on their and their family’s unique circumstances and objectives. No two markets are the same and past performance is never an indication of future results.
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