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Tags: crash | 1987 | stock | market | black monday

Crash of 1987: 'Those Who Cannot Remember the Past Are Condemned to Repeat It'

Crash of 1987: 'Those Who Cannot Remember the Past Are Condemned to Repeat It'
This is how papers across the country headlined the stock market plunge of Monday, Oct. 19, 1987 in an Oct. 20, 1987 file photo. (AP Photo, file)

By    |   Wednesday, 18 October 2017 02:17 PM EDT

Savvy investors will realize that there are some disturbing similarities between today’s hard-charging bull stock market and the events leading up to stock market crash of 1987.

Oct. 19 will mark the 30th anniversary of the 1987 stock-market crash, which happened to fall on a Monday.

That day still stands as the biggest percentage loss in the history of the Dow Jones Industrial average, with a 22.6 percent, or 508 point, decline. The S&P 500 fell over 20 percent on the “Black Monday” crash of Oct. 19, 1987.

Meanwhile, ABC News Australia summarized the similarities, how the list of events leading up to the 1987 crash “make for interesting reading 30 years on:

  • The current bull run is now three years longer than the lead up to the 1987 stock market crash.
  • Investors are bidding up new leveraged products, which could have the same impact as the derivative-driven crash of 2007.
  • Interest rates are heading up, just as they did before October 1987.
  • The Federal Reserve was in a state of flux.
  • Tensions between the U.S. and Iran were mounting and missile fire was exchanged.
  • The oil price tumbled about 50 percent from the year before as OPEC lost control of the market.
  • A massive, "once-in-a-century" storm blew up in the North Atlantic and hit the U.K.

The 1987 crash is famously now known as a buying opportunity. The Dow industrials recovered in two years to reach previous highs reached in August 1987, Reuters reported.

Despite several rough periods for markets since, most notably the 2008-2009 financial crisis and the bursting of the 2000 dot-com bubble, the sheer magnitude of the one-day fall hasn’t been approached.

Now, if a 22-percent decline were to occur, trading would be halted on the New York Stock Exchange for at least one hour and possibly for the rest of the day, depending on what time such a plunge occurred.

Veteran investment adviser Tom Murphy warns that one investment item in particular could help trigger the next market fiasco: the explosive growth of exchange trade funds, or ETFs.

"The next stock market downturn will have ETFs at its core," said Murphy, who works with private wealth advisers, Escala Partners.

ABC reported that he also is watching the Federal Reserve as well. He explained that the Trump White House just might nominate a "hawk" to replace Janet Yellen, similar to the appointment of Alan Greenspan 30 years ago.

"A lot of his constituency want higher interest rates because they have their retirement and investments' tied to fixed interest and bonds rather than the stock market," he said.

Meanwhile, Bloomberg View's Barry Ritholtz agrees there are some strange similarities between yesterday and today. However, he explained that the evidence has to be viewed in the proper context.

"Most of the underling factors that drove that meltdown were very different from today's market structure. First and foremost among those differences is portfolio insurance," he wrote in a Blomberg View column.

"This was a product so foolish it is hard to imagine today. How could anyone think buying puts -- which become more valuable as the price of the underlying stock falls -- amid a downturn would protect against further losses? I guess the idea was that option traders were going to become insurance underwriters for portfolio managers and absorb all of the losses."

He said he found the following attributes of 1987" most intriguing":

  • The rally from 1982-87 followed a 16-year bear market where stocks were extremely volatile, with big rallies and selloffs. In that period before the bull market started, stocks were essentially unchanged -- and that's before accounting for a lot of inflation in the 1970s and early 1980s.
  • A Federal Reserve chief turned out to be particularly friendly to equity markets, and was willing to keep lowering interest rates.
  • A bull market had begun in 1982, when stock indexes broke out to new highs for the first time in more than a decade.
  • The move off of the 1982 break out was greeted with broad skepticism and disbelief by investors. Even five years later, there was still plenty of doubt.
  • Despite this doubt, during the next five-plus years, the Standard & Poor's 500 Index would almost triple in value.

"The relevant parallels end there. The start of 1987 saw a hot market running way ahead of itself. The Dow gained almost 14 percent during January 1987 alone; as summer was ending, the index was up almost 44 percent by Aug. 25, while the S&P 500 was up more than 39 percent," he wrote.

"From there, markets started to lose ground, falling almost 15 percent from the peak through Oct. 15. On the Friday before the crash, the Dow fell 4.6 percent," he wrote.

"Even though many of the parallels that pundits are trying to draw between now and then are a stretch, there are still worthwhile lessons to learn."

(Newsmax wires services contributed to this report).

© 2024 Newsmax Finance. All rights reserved.

Savvy investors will realize that there are some disturbing similarities between today’s hard-charging bull stock market and the events leading up to stock market crash of 1987.
crash, 1987, stock, market, black monday
Wednesday, 18 October 2017 02:17 PM
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