2017 Third Quarter
I was a senior in high school in my introduction to economics class. My econ teacher asked me to check the status of the stock market as the news was not good in the early morning hours of October 19, 1987. Asian markets were plunging and U.S. markets opened lower as there were many more equity sellers than buyers. I walked down the hall and used a pay phone to call the Ziegler Thrift Trading’s - the discount broker I used at the time - toll-free telephone number. I can’t remember the point total I reported back with in that early morning hour, but I remember it was a big drop. In fact the Dow Jones Industrial index would end the day down an incredible 508.32 points or 22.6% – the largest single-day crash ever. The 30th anniversary of Black Monday occurs in a few days and I thought it would be noteworthy to reflect on this historic event.
We will not take the time to debate the many reasons why the market dropped that autumn day. I am more interested in reminding everyone that it happened. There is little the Federal Reserve, President Trump or the Securities and Exchange Commission can do to prevent market drops from occurring in the future. According to the Wall Street Journal, Xavier Gabaix, a professor of economics and finance at Harvard, believes a drop like Black Monday will occur once every 150 years on average and a one-day drop of 12.8% should occur every 27 years, on average. My point is that we need to concentrate on what we can control and accept that there is a possibility the market could drop significantly in one day or over several days. Obviously, we can control our allocation of stocks to bonds so please let me know if you have any concerns regarding the risk you are taking within your portfolios. The other point I would make is even if you did not have any bonds or cash in your portfolio to blunt the sudden drop in 1987, it took two years from that drop to recuperate what you had lost. Thus, time can be your friend when equity investing - you just have to be patient.
At this time the path of least resistance seems to be an ever increasing stock market. I have heard some describe it as a “melt up” market. At the beginning of the year most analysts believed that the market was higher due to the business friendly promises made by our elected government. As spring turned to summer and summer to fall, investors found the global economic picture improving and corporate earnings both here and abroad were the beneficiaries. This in turn has helped boost investors’ confidence. Thus, in order for this bull market to continue, the global economy and current earnings need to remain strong.