Black Monday: The 1987 Stock Market

black monday stock exchange floor

In case you missed it, you can watch an “At a Glance” summary of this week’s blog posting here.

I want to pose a question to you.

Are you prepared for a 1987 stock market event?

The 1987 stock market event in question was actually a “Monday, October 19th stock market event”, when the Dow Jones Industrial Average fell 22.6% in one day.

1987 stock market crash

This post is putting “that” day into perspective. Because “1987” has been prostituted around so much that people have forgotten to actually go back to 1987 and see what actually was happening.  

So what happened?

Let’s dig in and look at it from three different points of view… stocks, bonds and commodities.

But before I do, let me share two scary images with you. The front page of the New York Times below where they make things worse by doing an old “pick of the month” newsletter stunt and comparing any current date or event with 1929.

But NYT’s can supposedly get away with the comparison because they say, “Does 1987 Equal 1929?” Did you catch that? The NYT’s used the old “question mark” stunt…

Notice also the language “plunge” “frenzied trading” “worldwide impact…” It reads like the world ended. But it didn’t of course. And we forget, most people didn’t know “it” happened until they got home that night from work and the six o’clock news got to scare the hell out of them.

There was no Twitter or Facebook or Zerohedge ramping up the fear. People had to wait to get scared, this is why I stopped watching the news in 1997.

new york times black monday

The next scary picture is the actual price drop of 22.6% for “Black Monday.” Yes. That is scary.

20% drop in stock market in 1987

I don’t  want you preparing for a 1987 event.

You know why? Because it was an incredible outlier. Yes, some people called it. But how many called ‘it’ in 1982, 1983, 1984, 1985, 1986, 1988, 1989, and so on and it never came true.

There will always be the few that “called” it. And in a 120 year stock market history there isn’t another 1987. So it stands out to the human brain because it’s easy to remember.

As you can see in the chart below “drops” in the market are normal. The bottom part of the chart (the red section) below shows the “drawdowns” of the market… basically the falls. See the blue horizontal line among the red in the bottom part of the chart? That is the 20% loss mark.

Notice that there are very few drops more than 20% in the last 120 years let alone a 23% drop in one day.

READ: do not optimize to every possible action of the past 120 years. If you do, you will end up with an incredibly complicated and poor performing strategy. Or you’re money will just be sitting in cash waiting for the next 1987 event.

history of 20% drawdowns

1987 doesn’t matter all that much.

It was a different era. The U.S. economy represented about half of the world’s GDP. The dollar really was king then. There was no Chinese Yuan. We had the German Mark but it didn’t represent the largest economic block on the planet. It was a very different time.

Just look at P/E ratios. The P/E ratio of the Stock Market was at 6 just five years before the fall. This is important because that 1987 fall happened in the first third of the greatest bull market in history.

Now look, I get it.

There are some scary things that are happening today. There’s a lot of uncertainty. There’s negative yielding bonds stills. Collectively central banks are still printing $180 billion a month. North Korea is a concern. Trump has brought a lot of uncertainty. The Fed is getting a whole new set of leaders via Trump nominations. Read: lots of unknowns.

Oh yeah, and then you have the Shiller 10 P/E ratio also known as the CAPE above 30. That’s a big number. Seen last in, wait for it, the dot com correction. So no one out there is saying, things are cheap. This market isn’t being lead higher by fundamentals. This market is being lead higher by Central Banks… still.

1987 really was a freak event. Could another freak event occur? Of course. But how do you prepare for it? Buy Bitcoin? Okay. How much? And when? And what if it drops by 50% then what? What’s the plan?

People don’t get annual shots for rare disease, like Aagenaes syndrome. They get them for high probable illnesses like the Flu.

Build a strategy that fights the Flu and not Aagenaes Syndrome (read: 1987 Black Monday).

What You Can Prepare For

What you can prepare for are high probable corrections, like the 2000 Dot Com correction and the 2008 Global Financial Crises (these are the Flu’s of the stock market). 2000 and 2008 were more of the predictable type of corrections. Why do I say that? Because  fixed-income, real estate, commodities and stocks were telling you something had changed. And so the investor better take notice.  

That didn’t happen in 1987. I am going to tell you why.

The major players in 1987


The Stock price chart below runs from late 1984 to mid 1989. Four things stand out to me:

  1. The Dow Jones was up 127% from 1985 to October 19th 1987. So for the preceding 34 months the Dow was up an incredible 127%! A 33% correction from an investment that is up 127% in the preceding 34 months is not that outlier-ish.
  2. The Dow finished 1987 up 5%. So even though there was this crazy event, the market still ended higher for the year. And that doesn’t include if investors reinvested dividends.
  3. The stock market did not drop below that Black Monday low EVER AGAIN. It retested it. But all the sideways-ness was above lows.
  4. Once the market made that crazy low, it went higher for another 13 years. For a total gain of another 560%.

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33% stock drawdown followed by 127% stock uptrend


The price chart below is of the 10-year US Treasury and runs the exact same time frame of the “Stocks” price chart above. So what stands out?

  1. Bond prices fell mid-year in 1987 by 25% before before Black Monday. The market was moving out of bonds and not into them.
  2. Prior to the actual “Black Monday” event bonds were ‘only’ up 45% during the exact same time period stocks were up 127%. So the market was clearly saying, stocks are safer.
  3. When the actual event did happen, did bonds explode higher? No, the moved up was a modest 12%.That’s it. So there wasn’t even a panic into bonds.

Bonds down 25% before black monday


The following stands out to me in the commodities chart below

  1. Confusion. First the commodity complex fell 20% and then rose 20% in the preceding 34 months to Black Monday.
  2. When “Black Monday” actually happened, commodities were up 1% during the event, which means no one panicked out of stocks and into commodities.
  3. Commodities were up 14% for 1987 but with such confusion in the preceding few years there was no direction.

Commodities down 20% and then up 20% and then down


And if you are thinking everyone piled into the US Dollar, you’d be wrong. Just look at how ugly the US$ price chart is below. There was no love for the US$ before, during or after. Ouch.

US Dollar down 18% before black monday

What do we know?

I know what i’m about to say sounds sarcastic and even weird but the only place panic happened was in the stock price.

Panic didn’t happen in behavior.

Panic didn’t happen in allocation change.

Panic didn’t happen in anything but a price drop.

And you know why?

Because people had already identified that stocks were the “safe haven.” The market already said, the safe uptrending asset is stocks.

Yes, that was a horrible day and a scary day. And the strategy that optimizes for everything is going to grow nothing.

How does the Big-Box Industry manage 1987?

  1. Go long, never get out and just suffer through the corrections and don’t think about how inflation lengthens the time to break even. Also known as buy and hold. Or…
  2. Put 60% of your money in stocks and 40% of your money in bonds. And then just arbitrarily sell some of the winner every six months and put that into the loser.  This is akin to driving across the country with one foot on the gas pedal and one foot on the brake pedal… just in case there is a hairpin turn. Also known as the 60/40 split with rebalancing.

If you haven’t already, you may want to check it out, what I like to call “the third option.” It’s not Big-Box and its not “pick of the month.”

It’s the third choice. The powerfully simple choice.


In Your Corner,

RCPeck-Dig Signature.JPG     
RC Peck, CFP





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