BLACK MONDAY
ITS UNLIKELY CRASH
On the 30th anniversary of the 1987 stock market crash known as “Black Monday,” the Dow enjoyed a “Turnaround Thursday,” rebounding from an eerie 105point early dive to register its 52nd record close of the year.
The bullish end to the day for the Dow Jones industrial average was a reminder that market crashes are rare events, and that the regulators that police Wall Street have taken steps in recent years to lower the odds of another market meltdown.
Today’s stock market has some built-in shock absorbers designed to slow down a meltdown that it didn’t have 30 years ago when Ronald Reagan was president and the Dow fell 508 points, or 22.6% — in a single day.
Back in 2012, Wall Street’s top regulator revised so-called “circuit breakers,” to help slow the descent of the stock mar- ket on days it was in freefall. Simply put, the circuit breakers shut down the market temporarily after dramatic drops.
The Dow closed up 165.59 points Friday to finish at a record high of nearly 23,439.
Here a few reasons why a 1987-style crash might not occur or play out the same way today:
CIRCUIT BREAKERS HELP TO SLOW DECLINES
Under the circuit-breaker rules, market-wide trading halts are triggered if the Standard & Poor’s 500 stock index falls 7% (Level 1) or 13% (Level 2) or 20% (Level 3) from the prior night’s close.
If drops of 7% or 13% occur before 3:25 p.m. a 15-minute market-wide trading halt will kick in. If similar declines come at or after 3:25 p.m. no halt will occur. If a market drop of 20% triggers a Level 3 circuit breaker at any time during the day, trading will be shut down for the rest of the day.
“The idea of the circuit breakers is to bring short-term stability to the stock market and prevent fear and panic from snowballing,” explains Joe Quinlan, chief market strategist at U.S. Trust.
2017 MARKET IS ON MORE SOLID GROUND
Today’s market hasn’t raced ahead quite as fast or exuberantly as stocks did leading up to the 1987 crash. What’s more, today’s interest rates are far lower and less threatening to stock valuations than back in October 1987 when the 10-year Treasury yield was 10%, vs. today’s yield of 2.3%. Corporate earnings have also been strong, which is another pillar of support for stocks.
The U.S. economy also is in solid shape, as is the global economy, where virtually every country is seeing an uptick in growth.
INVESTORS HAVE LEARNED FROM PAST CRASHES
Investors haven’t forgotten the 1987 meltdown or the more recent “Flash Crash” in May 2010 that sent the Dow spiraling down 600 points in minutes and almost 1,000 points on the day before recouping the bulk of its losses.
“It makes me much more aware of tail risks, which is a good thing,” says Brad McMillan, chief investment officer at Commonwealth Financial Network.
McMillan won’t rule out another crash one day, noting that investor complacency is high at the moment and “now as then, investors really believe markets are low risk and that returns are more or less ensured.”