This post was written by guest columnist Harvey Siegel, CPA. Harvey is a senior financial advisor based out of Apella Capital’s Lenox, MA office.
On Monday, October 19, 1987, the Dow Jones Industrial Average (DJIA) closed down 508 points, or 22.6%. “Black Monday,” as it was called, remains the largest one-day percentage decline in the history of the DJIA. Your writer files it as a “where were you when it happened?” moment. Less than a month later, the founding principals of the predecessor to and currently senior financial advisors of Apella Capital, Lenox, MA started their new business.
In the last thirty years notwithstanding asset bubbles, three stock market crashes and as many recessions, political turmoil, wars, natural disasters, Eurozone crises, the rise of terrorism and the worst financial meltdown and economic downturn since you know when, the S&P 500 had a total return of over 2,000%.
Thirty years later, we transitioned from a startup investment firm in a time of market chaos (market timing isn’t a strength), to investment and tax planners advising others on their wealth. And, regardless of our sense of dread at the time, post-crash 1987 was a great time to start an investment business.
Nostalgia aside, we thought back to prior crises and crashes. Each was different in apparent cause, magnitude, and duration of market decline. What they shared in common was that investor anxiety seemed proportional to declines that had already happened. In retrospect, we characterize pre-crash periods as irrationally optimistic.
Coming to terms with emotions is what we do. The basic premise is that the aggregate of global markets recover, which is a good thing since we don’t know how to invest for Armageddon. Consequently, a rational investor would be buying when the pain of additional loss is at its most unbearable and selling when further gains seem inevitable.
Back in 1987, there was no consensus on what caused the crash. Theories included program trading or computerized selling dictated by portfolio insurance/dynamic hedging strategies (worth a letter in itself on this self-delusional method of insuring against market losses), overvaluation, investor psychology, inflation fears, etc. As reported in the New York Times in December 1987:
After the markets’ October crash, the Institute for International Economics, a Washington research group, called in 33 American and foreign economists, including five Nobel Prize winners, to reassess global conditions. Their conclusion: Measures to narrow America’s budget deficit and trade deficit, and to spur growth in Germany and Japan do not go nearly far enough.
For now, as then, the aftermath of a crisis continues. While markets have recovered strongly from financial crisis lows, global financial imbalances remain. Thirty years later, the conventional wisdom is to worry even more about America’s budget and trade deficits, less about growth in Germany, and much more about recovery in the rest of the developed economies and whatever happened to Japan, anyway?
At the same time, US stocks seem priced for endless good news and bonds in developed economies outside the US are priced to earn nothing percent after inflation. Maybe thirty years from now a maturing advisor will reflect on the calamitous (or not) consequences of tax reform in the US, looming trade wars, political instability of the European Union and the as yet to be seen unintended consequences of central bank intervention known as quantitative easing. The list will go on (it’s always something) and outcomes aren’t predictable (you never know). For now though, as it was thirty years ago, the prudent course is to stay the course.
Oh, while it might be tempting to limit your investment risk to markets that feel the safest (US stocks have stood out since the financial crisis), diversification mattered then as it does now. What happened to Japan was a real estate and stock price bubble that started a few years before the ‘87 crash and ended a few years later. The Nikkei 225 stock index peaked in 1989 at nearly 39,000 and 29 years later trades about 42% lower at around 22,000.
Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted.
Index Disclosure and Definitions
Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.
Dow Jones Industrial Average (DJIA) Index: The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq.
S&P 500 Index: Represents the 500 leading US companies, approximately 80% of the total US market capitalization.
Nikkei 225 Stock Index: The Nikkei is short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index composed of Japan's top 225 blue-chip companies traded on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the United States.