Can you imagine the U.S. equity market falling over 20% in one day?
It is easy for those that remember "Black Monday," which happened 30 years ago on October 19, 1987, when relentless waves of selling drove major equity indexes around the globe down 20%. The event was the culmination of what turned out to be a very sharp but very brief bear market. Confounding nearly every observer, then and still to this day, the crash did not amount to much in the broader economic context. Equity markets quickly regained their footing and vaulted to new highs through the 1990s amidst speculative excesses that made previous periods look demure.
But it is still hard to wrap our brain around a stock market drop of 20% in a single day, especially since it has been pretty much a one-way ride up since March 2009.
Check this out: there has been only a single instance of a daily stock market drop greater than 5% since 2009, as shown in the chart below. The top panel shows the daily price chart of the S&P 500 Index in green going back to 1977; the bottom panel shows the daily price change of the S&P 500 Index in orange over the same period. It’s crazy how much the drop in 1987 sticks out in terms of single-day events.
But don't take it from us … take it from Robert Schiller, winner of the economics Nobel prize in 2013, who took up the question in his great New York Times piece last week reflecting on his Black Monday conclusions:
I base this sobering conclusion on my own research. (I won a Nobel Memorial Prize in Economic Sciences in 2013, partly for my work on the market impact of social psychology.) I sent out thousands of questionnaires to investors within four days of the 1987 crash, motivated by the belief that we will never understand such events unless we ask people for the reasons for their actions, and for the thoughts and emotions associated with them.
From this perspective, I believe a rough analogy for that 1987 market collapse can be found in another event — the panic of Aug. 28, 2016, at Los Angeles International Airport, when people believed erroneously that they were in grave danger. False reports of gunfire at the airport — in an era in which shootings in large crowds had already occurred — set some people running for the exits. Once the panic began, others ran, too.
That is essentially what I found to have happened 30 years ago in the stock market. By late in the afternoon of Oct. 19, the momentous nature of that day was already clear: The stock market had fallen more than 20 percent. It was the biggest one-day drop, in percentage terms, in the annals of the modern American market."
What you can control is what you do before it happens and when it happens.
Before it happens, the right asset allocation — your mix of equity, fixed income and diversifying alternatives — can help you meet long-term wealth planning goals while cushioning the inevitable jarring equity market drawdowns. And when those drawdowns rear their ugly heads, you can control how you act by not giving into the panic and selling at the bottom.
One of the best takeaways from the above chart is the opportunity cost of selling each time the equity market has bottomed over the last 40 years!