How the 1987 Crash May Have Lessons for Today

Wednesday marks the 35th anniversary of the 1987 stock market crash, when the market fell 22% in one day. What’s remarkable about Black Monday, as it’s known, is that it didn’t usher in a recession, as financial shocks often do (see 1929).

Back in 1987, people were convinced that an economic disaster would ensue, Bespoke Investment Group observes in a research note. The crash, it writes, “prompted questions over whether it was a repeat of 1929 and the depression that followed.”

Without opining on whether 2022’s market slide portends an economic downturn or not, Bespoke noted that the upshot of the 1987 market plunge was benign for investors. If the present time follows the 1987 pattern, then it would vindicate the believers in a soft landing for the current wobbly economy—and a reprieve for stockholders.

Today’s market is down slightly more year-to-date than Black Monday experienced in a single day. The background 35 years ago was that the market was losing energy owing to a high trade deficit (which fostered worry over the U.S.’s international competitiveness) and congressional moves to tighten rules on mergers, which then were happening pell-mell. One big difference between then and now is that, in the late 1980s, inflation wasn’t a problem and the Federal Reserve wasn’t embarked on a painful rate-raising campaign.

So, the market and the economy in 1987 shrugged off the crash (with the help of the Fed’s injection of liquidity into the system to smooth over the unpleasantness). And equities went on to thrive.

After Black Monday, Bespoke calculates, the S&P 500 produced an annual total return of 10.7%. And if an investor had bought on the Friday before the crash, his or her return would’ve been 10%. “Not bad for the worst-timed trade of all time,” Bespoke comments.