Thirty years ago on this day, the Dow Jones plunged by 22.6% in a single trading session. 508 points.
As a young broker at the time, I was there and took panicking phone calls. But now, thirty years after the event, I’d like to share a few points:
- I’m still here. And so are you.
- A crash like that today would be the equivalent of a 5000 point drop in the Dow.
- The “tape” — which reported all NYSE trades — was nearly four hours behind. Meaning, we did not know the actual point drop until almost 8pm that evening. I had not seen a tape delayed more than 15 minutes prior to that day.
- Trades were still being corrected weeks later, in mid-November (I owned a few of those corrections).
- Stories circulated some market makers took the phones off the hook, ending trading for the day.
- The Friday before (October 16, 1987) the Dow Jones lost more than 100 points in a single day, the first time ever.
The following morning after the crash, the market continued its’ plunge. But by mid-day Tuesday (October 20, 1987), the market regained six percent, then it gained nearly 10% the following day. Violent moves no one had seen before.
A few other points:
- If you were trading on margin, you were abruptly finished.
- If you were long calls (as many were), they were re-priced at zero.
- If you owned puts, you bragged about it.
And even with that one-day drop, the Dow finished UP for 1987.
But the damage was done. I heard clients tell me they never wanted to be in the stock market ever again. These were not prospective clients I was cold-calling, these were folks who had money in the market with me. Brokers around me (who were previously swinging stocks over the phone) spent the next twelve months quoting CD rates to their clients. For some of these brokers, it was the only work left to do.
As terrible as that day felt, what happened was a correction. It seemed like a seismic earthquake for those involved at the time. The further we’re distanced from the event, the smaller in significance it seems. But I went home that night and wondered if I would even have a job in the coming weeks. All my clients were blown up to some extent. Would my firm need to cut staff? Would some firms close or merge? Would I have to start over? And, who would want to invest in stocks after this event?
The big take-away for me (as time progressed) was learning the difference between a correction and a bear market. Corrections can resolve themselves quickly. Bear markets are long events, and are usually measured in months (and sometimes, years). And bear markets do not necessarily need to fall straight down, they can be enduring listless downward drifts of depression.
When this current market eventually begins to fall, we’re probably not going to know if it is a correction or a bear market. They will resemble each other. In the heat of the action, it’s tough to tell if the market is correcting or making a complete change in direction.
But corrections happen – and then we move on. And bear markets eventually end. If you are investing with a goal in mind (like, retirement?) your time frame should be known in advance. It’s hard to succeed when you are “playing” day-to-day, week-to-week, or even month-to-month. For example, if you are thirty, you should be looking at a “thirty-plus years” investment time frame or longer. If you are 55, your time frame is different, but it’s not zero, either. In ten-year chunks, take a look:
Dow Jones October 1987: 1,738
Dow Jones October 1997: 7,847
Dow Jones October 2007: 13,888
Dow Jones October 2017: 23,150