Is Another 'Black Monday' Stock Crash Imminent?
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What happened on Black Monday in 1987 and why does it still matter?
This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen in New York. We're about to hit the 30th anniversary of Wall Street's Black Monday. That was when, on October 19, 1987, the Dow Jones Industrial Average fell 22.6% in one day, the worst one-day drop in market history. The Dow Jones Industrial Average fell 22.6% in one day, the worst one-day drop in market history. And as that day approaches, we're likely to hear as much commentary suggesting a stock market crash is imminent, giving the market steep run-up, as we are to hear that a crash is unlikely. MarketWatch senior columnist Mark Hulbert says don't buy into either extreme, and he joins us to discuss.
So, Mark, if a 22.6% drop in the Dow were to happen these days, that would amount to a roughly 5,100-point decline. Now, you write in The Wall Street Journal that another crash being imminent isn't likely, but also not out of the realm of possibilities.
That's correct. In one hand, you might say, you know, it's unremarkable for me to report that the truth is somewhere in the middle. But in this case, it really is the truth is somewhere in the middle. Almost everyone will exaggerate. what the impact of that crash would have for investors today. Those who think that it'll never happen because of regulatory changes and so forth, like circuit breakers and trading halts and that sort of thing, are kidding themselves. I can go into why in a minute. On the other hand, those who think another one's going to happen right away just because the market has been so strong lately are no doubt exaggerating how likely it is for another crash. But again, the truth is somewhere in the middle.
So we're currently in the second longest bull market in U.S. history. It dates back to March of 2009. And one might think that the law of averages would dictate that the longer we go without a substantial decline, the likelihood of that happening increases. But researchers you spoke with, they haven't found that correlation.
there is at least some sense in which a big run-up does increase the risk of a decline, but the run-up has to be a lot stronger than what we saw. So for example, the study that I quote in the column in the journal basically says that you have to have a 100% increase over a two-year period in order for there to be a meaningful increase of a big decline over the subsequent two years. If you look at that as 100 percent threshold over a 24 month period, we're not even close. I think the last I've looked, the market over the last two years is up something like 32 percent, give or take. So we're not even close to the kind of huge run up that at least historically has led to an increased probability of a decline.
And when it comes down to it, a lot of these researchers and the modeling has said that it really comes down to institutional investors that are really in the driver's seat.
Well, that's right. And that's the reason why we should never kid ourselves that we can ever prevent a crash from happening. The research that I quote, and this is other research that goes into why crashes happen in the first place. does point the finger at institutional investors, as you indeed suggested in your question. It turns out that if institutional investors, for whatever reason, all more, it doesn't have to be all of them, but a good percentage of the institutional investors all want to get out of stocks more or less at the same time, they will figure out how to get out of stocks, regardless of how many trading halts and circuit breakers and other regulatory changes that we think might protect the market.
For example, if you're a big institutional investor on Wall Street and you want to get out of stocks and for some reason they put a trading halt in the New York Stock Exchange, all you have to do is go trade on the London Exchange, where most of the big traded stocks in this country are also trading. You can also go into the global futures market and sell. So it turns out this notion that somehow we can prevent the market decline by saying, hey, we're going to have a timeout and have everyone sort of go back to their corners, we're just kidding ourselves.
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