Today’s downturn will recall Black Monday in only one way

Thirty-five years ago this week, the stock market had its worst single day ever.

Black Monday, Oct. 19, 1987, saw the Dow Jones Industrial Average plunged 508 points, losing nearly 23 percent of its value in a day-long tempest of selling that nearly broke the financial system.

At current levels, it would equate to the Dow losing over 7,000 points in one day.

I can tell you exactly what I was doing on Black Monday — it involved covering the market for the St. Petersburg Times in Florida — but I have no memory whatsoever of what happened to my investment portfolio that day.

In fact, in all the times when I have discussed the market’s worst day ever — something I have done a lot — I have only ever found two people who could remember what happened to their investments that day.

Both had sold stocks, preferring cash to crash, and both remembered the moves years later because they were dreadful mistakes, bailing out at exactly the wrong time.

The anniversary of Black Monday brings up an important reminder of how investors should behave now, even though the circumstances were quite different than what people face in today’s rising-rate, high-inflation recessionary conditions today.

Before getting to the key takeaway from 1987, let me reassure you as to why I don’t think that kind of catastrophic action is in the offing now.

For starters, the market itself changed in the wake of Black Monday. With selling action testing the limits of the financial system, “circuit breakers” were put in place following the ‘87 crash that force 15-minute trading halts once the market declines 7 percent, again at 13 percent, and that shut the market for the day after a drop of 20 percent. (While everyone quotes the Dow from Black Monday, it’s worth noting that the Standard & Poor’s 500 also was off by more than 20 percent that day.)

Those trading halts — last triggered in March 2020 at the start of the COVID-19 pandemic — help the market regain equilibrium, dramatically reducing crash potential.

Another significant change is that Black Monday is generally credited as being the origin of “the Fed put,” the idea that the Federal Reserve will take extraordinary measures when market values are plummeting.

The other reason that another Black Monday-like crash seems unlikely now is that the stock market doesn’t always lose ground in big chunks.

The market’s 20-plus percent decline this year doesn’t mean the bottom is in, but it reduces the potential for an enormous downdraft. (It also has changed the voracity of the Fed’s response, because the year has been more steady bleed than gusher.)

Black Monday didn’t come out of nowhere — the market lost roughly 10 percent in the three trading days prior to the crash, but the S&P 500 was up roughly 33 percent for the year as it entered October; that meant that most investors entered the big day with their portfolios still up for the year.

Clearly, the market could go lower from current levels — we could still see dramatic losses — but it’s hard to see the catalyst that could make it happen in a cataclysmic single day or two.

One other key difference is in how investors respond to bad market news.

In the 1980s, selling out in the middle of a freefall was hard; there was no Internet, no trading platform on your desktop or phone, limited discount brokerage options and traditional mutual funds — the favored vehicle of average long-term savers then — only trade at the end of the day, so anyone who bailed on their favorite growth fund on the morning of Oct. 17 didn’t get their transaction processed until the market closed and the carnage was complete.

That worked in favor of most investors, forcing them into inaction. It’s not just that the Dow regained 288 points in the first two trading sessions after Black Monday, but the markets had surpassed pre-crash highs less than two years later.

Here’s the big point: No investor who rode out the single worst day in market history has had to postpone retirement or change their financial lives as a result of living through it with their portfolio intact.

The 30-year-olds of that era are pretty happy with the outcome as they now reach retirement age.

Thus, the lasting lesson is that the biggest, baddest market days are all forgettable, ordinary life events provided you don’t overreact to them.

That’s not necessarily encouragement to “buy the dip” — because 20 percent losses are a lot worse than a “dip” — nor a recommendation to stay the course with investments in which you’ve lost confidence.

It is a reminder that the one place where investors can remain confident is in the long-term viability of the market.

Talking with experts every day on my podcast, “Money Life with Chuck Jaffe,” it is clear that the best and brightest money minds disagree on how long the downturn and any accompanying recession will last, how bad it will get, and how to best play it as it happens.

Yet almost every expert agrees with the idea that there will be a rebound, and that investors who can be patient will be paid off for keeping their composure.

The 20-percent downturn level is where many investors typically start bailing out.

Sell, if you must, investments that are out-of-sync with your time horizons. Protect yourself against the market’s short-term whims, and stay diversified, even if holding certain types of assets makes you uncomfortable right now.

But keep an eye out for the long-term too.

Three decades from now, market experts will reminisce about today’s times, citing high inflation and the fast, big hikes in interest rates and how the market responded while waiting to see the effectiveness of Fed policy.

Yet, chances are that the average guys looking at retiring around 2050 will not remember this time particularly vividly. Like Black Monday 35 years later, they’ll flash on some mild discomfort, but mostly see it as nothing more than a speed bump on the long drive to reaching their financial goals.