Friday was the 30th Anniversary of the Wall Street’s Black Monday Crash on October 19, 1987. I remember sitting in college that afternoon and my friend telling me he heard on the radio that the Dow Jones had dropped over 500 points that day (508, to be exact). I was incredulous that the market could drop that much in one day (-22.5%) and imagined that he had just heard it wrong. I was a business major, but a drop that significant really shook the markets and the Dow Jones finished the month down -45% in all.
This got me thinking, what would we do if the stock market suddenly fell 22.5% TODAY? With the Dow Jones sitting at 23,328 this morning, that would be like it dropping a shocking 5,249 points by close. Would I immediately dust off my resume and start a job hunt? Or, would we be cool enough to weather the storm?
Some of the same factors that triggered that sell off seem to exist today: the market had grown substantially the 18 months leading up to the crash (Trump bump?), much of the trading was done by computer (although ‘circuit breakers’ have been put in place, and there were a number of geopolitical events happening (Middle East? North Korea?).
In the months following Black Monday, the market gradually caught back up to its previous high. It took about 15 months for that to happen. We carry about three years of spending in cash, so we could weather a storm like this – or the 2008 crash which was less sudden, but equally deep. Three years spending seems like a lot – but it’s good insurance. That said, some of our wealth is in stock options, so we definitely would take a haircut on those shares – since they have a fixed window in which they need to be exercised.
We would also likely opt to cut back sharply on spending. Much of our spending is discretionary, so it would make sense to introduce an austerity program until we saw some market recovery. That wouldn’t be fun, but it would keep us from going back to work for quite a while.
Sorry to start the week on such a down note, but the anniversary of Black Monday should be a reminder of the unpredictability of the markets. Next year will be the 10th anniversary of the 2008 crash that led us into the Great Recession. That will also be another reminder not to get too aggressive in equities investing. Given the slow recovery that happened with that downturn, everyone should have a plan for what they would do in these kinds of situations.