By Alexander Green This week is the 30-year anniversary of the stock market crash of 1987.
Anniversaries generally mean celebrations. But it’s unlikely that anyone other than the rare short seller reached for the good champagne this week – or savors any particularly fond recollections.
On October 19, 1987 – Black Monday – the Dow plunged 508 points, or 22.6%. As my friend and colleague Mark Skousen pointed out here yesterday, it was the market’s single worst day, before or since.
I was a stockbroker at the time and remember it well.
The market had peaked two months earlier and had since been acting a bit hinky, with wild single-day rides up and down.
Still, no one knew what we were about to experience that fateful Monday morning.
The market averages gapped down at the opening bell. Many stocks didn’t open at all for several minutes, as specialists on the floor struggled to match buyers with the tsunami of sell orders.
My Quotron – there’s a term you don’t hear much anymore – lit up in a sea of red as the downdraft quickly turned into a rout.
Investors and traders treated even the bluest of blue chip stocks like cigarette butts. The phone lines lit up with calls from panicky clients.
Some of the brokers and analysts in my office – first nervous, then spooked and finally horrified – eventually broke into a manic laughter.
This wasn’t supposed to happen. Yet it was.
We stared at our screens transfixed, like motorists passing a gruesome highway collision.
The most unsettling aspect of the ’87 crash is that no particular event sparked it.
Nobody got shot. No currency collapsed. No government failed. Nor were equities particularly overvalued.
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It was just a sudden rush for the exits, compounded by computer-driven program trading.
These programs were supposed to reduce losses through the use of futures and options. Instead they compounded losses, as wave upon wave of selling created a vicious cycle.
Regulators have made changes since then, of course. But so-called flash crashes still occur.
On August 24, 2015, for instance, the Dow plunged nearly 1,100 points during the first five minutes of trading. The sell-off was spurred by a drop in China’s market that echoed in Europe before the U.S. market opened.
Bonds are not immune to flash crashes either. On October 15, 2014, 10-Year Treasurys suddenly skyrocketed, causing yields to plummet 35 basis points in just a few minutes.
The SEC blamed it on automated high-frequency algorithms, the same algorithms that are in place today.
Yet another flash crash on May 6, 2010, caused the SEC to revise its circuit-breaker rules. A drop of as little as 7% in the S&P 500 can now trigger a halt. A tumble of 20% stops trading for the day.
What should we learn from these incidents?
For starters, the preternatural calm we have seen in the markets recently is not the norm. Stock market bolts often come out of the blue.
And, in my experience, the best investors don’t react to bear markets. (Reactions tend to be emotional rather than rational.) They anticipate them.
That means today – while the …read more
Source:: Investment You
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