October 19, 2017 marked the 30th anniversary of the infamous “Black Monday.” On Monday, October 19, 1987, the Dow Jones Industrial Index (Dow) plunged 508 points, or 22.6%, which was the biggest single day decline in percentage terms in the history of the market. To put it in perspective, that is the equivalent of an over 5,000 point decline in the Dow today!
With the Dow (and other indexes) at all-time highs, investors are concerned about a market correction, despite healthy economic growth and corporate earnings. After all, on average, market declines of 10%+ happen every 1-2 years. That said, could a repeat of “Black Monday” happen today?
Given modern trading technology and changes to the way stock exchanges operate, it’s unlikely we would ever experience another “Black Monday.” For one, following the 1987 crash, the Securities and Exchange Commission (SEC) mandated the creation of market-wide “circuit breakers.” These measures call for a temporary halt to trading after the Dow declines 10%, 20% and 30%. Since 1987, a circuit breaker was only triggered once – in 1997.
In 2012, the SEC lowered the thresholds needed to trigger a trading stoppage. Also, at that time, the S&P 500 replaced the Dow as the benchmark index. Under the updated rules, trading will be halted for fifteen minutes at intra-day drops of 7% and 13%. At a drop of 20%, trading is stopped completely. These rules were further tweaked after a very tumultuous trading day in August 2015.
What is often lost in remembering that fateful day in October 1987 is that despite the precipitous drop in the Dow, markets didn’t disintegrate. They pulled themselves together and rebounded. In fact, not only did the Dow finish in positive territory that year, but in the five years following the crash, stock returns averaged 15% per year.
What can we learn from revisiting “Black Monday” thirty years later? For one, market declines happen – sometimes for good reasons and sometimes not. Second, when the market does pull back, it’s important to remain objective and disciplined rather than act based on emotion. Finally, as Warren Buffet says, “when others are fearful, be greedy.” Every market drop, small or big, presents an opportunity to invest more at lower prices, rebalance your portfolio, or both.