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High anxiety and Black Monday

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Twenty-six doesn’t seem to be a magic number. But beginning a list of anxiety-producing events with Black Monday, a day, 26.4 years ago, that the stock market plummeted dramatically, seems okay for the purpose of making a point. One could look at any 26.4 year period and things to worry about that created stock-market angst for many probably wouldn’t be all that different.

This list is composed of things I remembered without trying hard. You may do better.

After surviving this list, the stock market and investing may endure anything, except the earth being directly hit by a comet or the failure of the sun. Not all of the items have enough gravitas to move the market into negative territory, but all of them probably had power enough to cause a number of people to worry excessively and exit investing at the wrong time.

The events in the following list are not exactly in order of occurrence, except that the list starts on Black Monday, and everything happens after that day.

1. October 19, 1987, Black Monday. The market fell and scared everyone, big time.

2. Chinese Takeover of Hong Kong–everyone feared that HK would become like China, but, really, China became more like HK. Who would have known?

3. Asian Currency Crisis.

4. Failure of Long Term Capital Management. This could have been the end, but wasn’t.

5. Russian bond default. Russia is in trouble economically again now; it’s a great place to invest right up until it isn’t and then it’s scary, really scary.

6. Japan takes over the world, economically (this theory was persistent in the 1980s, but began to wane as the 90s approached; now Japan is in third place for GDP and is having problems).

7. Baring’s trading scandal, which ultimately took down the investment bank.

8. 1993 World Trade Center bombing. The first one. I was at a conference in lower Manhattan not long after and saw the damage.

9. Washington 1990s storms: Travelgate; Hillary cattle futures killing; Whitewater; Vince Foster suicide, Monica’s dress and the impeachment; the Clintons not only survived, they thrived and the Bill, Hillary and Chelsea Clinton Foundation is a star non-profit. He was around for the 1990’s tech bubble, a good thing, and was active in repealing Glass Steagall, maybe not a great idea. Hillary is a former secretary of state and a likely candidate for president.

10. Y2K. Were you frightened? It was a non-event.

11. Tech Bubble–3/2000 to 3/2003. In the 1990s, no one could lose money in the market and so everyone got used to making great gobs of account values without thinking, not a great idea, as the period following proved.

12. Bad intel from the CIA about Iraq: WMD! Well, a majority believed there were weapons of mass destruction at the time. Moral: some dictators are blowhards and will say anything to get attention.

13. Wars—3.3 of them, Including Iraq twice—the first Iraqi war was in 1990-1991, at the end of the George H.W. Bush administration; there are still aftereffects from the 2nd World Trade Center bombing. (As many as 3.3 wars?; that’s a lot of wars.)

14. George W. Bush’s missing Air National Guard records (it might be hard to find my military records, too, and I was regular U.S. Navy, but anything gone from my file would likely not create a scandal). President Bush is now an artist. History may be kinder to him than many think.

15. The Grand Credit Debacle of 2008, which, I argue, started in mid-summer of 2007, when it began to be hard, if not impossible, to price credit.

16. The failures of Lehman Brothers and Bear Stearns, two storied investment banks.

17. The adventures of Elliot Spitzer, NY attorney general, who fined mutual fund companies for late trading (they seemed to pay large sums without a whimper). Many of the selfsame funds, and others too, instituted rules that restricted regular customers, customers who had nothing to do with the problems Spitzer uncovered. Spitzer got to be the governor of NY for a few days, but he seemed to have made enemies on the way up and was, even before he was the state’s CEO, unable to be a bad boy invisibly. He had to resign.

18. B. Madoff, low-life bastard, screwing customers and making life hell for many, who, I’m sure, hope he rots in that aforementioned fiery location.

19. Gold moves in an upward trajectory. People are afraid. Big surprise. Buying only gold is bad financial behavior.

20. Hedge fund manager scandals.

21. North Korea: nuclear tests, threats and weirdoes at the top (North Korea seems to do its best to cause trouble pretty much all the time).

22. Scandals related to insider trading

23. Greek debt. Ever notice how economic problems flourish where the weather is nice most of the year?

24. Greece again.

25. Italy. Sunny. Right.

26. Greece one more once. (And not much later, some are making a case for, as the weather warms in 2014—you guessed it!—investing in Greek bonds.)

27. Spain. Yes, sunny.

28. Europe. Not as bad a problem as Greece or Italy; its problems may have been partially from trying to help some of the sunny neighbors. Germany, where there are seasons, cold weather and people work, is an economic powerhouse.

29. ObamaCare–no one knows whether it’s good or bad, but everyone will find out eventually, right? So far, it seems to be expensive in terms of additional taxes for support, new higher healthcare premiums and increased Medicaid costs.

30. Crimea–is it Russia or is it the Ukraine? This is what is causing Russia’s current economic woes. When you read this, the problem will hopefully be over. No one likes bullies.

31. Flash trading. The scandal du jour, although it’s been a factor for years (stay tuned: Mr. Lewis may have been right about complexity in Panic in the next paragraph. Flash Trading is another good book, published weeks ago, for Mr. Lewis and a great read.

During this 26.4-year period, the world pretty much became a computer and Internet-based society. We all are now “connected,” and the markets are too. Michael Lewis, in his book Panic, postulates that some of the technical crises, some in the list, during this period are due to “complexity.” In other words, the market has moved from trading guys in pharmacy jackets holding up fingers to computer programs moving trillions of dollars being around daily.

As a practical matter, no one comprehends the hardware and software running things today; for example, there are thousands, maybe hundreds of thousands, of algorithms driving the market. The end-of-day market results sometimes explode in one direction or another, making me think that if humans react to rumors and news, algorithms must be programmed to really get weird when there is supremely good or supremely bad news.

Even so, even with all the scary things that happened in my 26.4-year list (and I’m sure a lot could be added), the stock market is the place to be. No matter whether a person is tactical, strategic or buy-and-hold, working smart usually wins the investment game. One may be too smart; Lewis, in Panic, cites Black Scholes as an example of uber-smart. Black Scholes basically says when the market goes down, down, down, one will be okay if he or she keeps shorting. Michael Lewis explains these complexities beautifully—in order to short, to bet against the market, there has to be someone to take the bet on the other side; if the market is really bad, who’s going to play?

My argument: Had an individual purchased shares of a certain mutual fund—just one fund; one I do not use in portfolios currently—on October 16, 1987, the Friday before black Monday, how well would that have worked through March 31, 2014? I fired-up Morningstar Advisor Workstation and started the exercise with $1 million, begin withdrawing monthly at a 4% annual rate, and inflated the withdrawals by 3% yearly. What happened? In 1987, for just over two months, withdrawals would have been $9,609 in total.

In 1988, the 12 monthly withdrawals would have equaled $41,386. Jumping to 2013, the total of the monthly withdrawals would be $212,520, keeping up with inflation nicely. The big question is this: How much principal is left? The answer is surprising: more than $2.5 million. This is based on using one mutual fund. I used one, first try out of the box, but I could run many others with equally good results. I used a load-waived version of the fund and added a 1% fee for the financial advisor (a commission-based C-share, had there been C shares in 1987, would have produced similar results). Over the 26.4 years, the retiree received over $3.6 million in income and has over $2.5 million left.

The idea, as it always is, is that working smart and sticking with the program can work beautifully, better than expected, if only people will exhibit good financial behavior and stop paying attention to the crisis of the day, a lousy month or even a bad several years. To get to $2.5 million, we went through the 26.4 year list, right?

Lots of bad stuff, but the end result is really good, No one makes a list of good things, but there are plenty—3D printers, the oil boom, big-screen TV, the IPad, the IPhone, Google, high-speed computing, better automobiles, the constantly-improving Internet—everyone now has a library bigger than any other, a modern Alexandria at one’s fingertips—and living in the digital age generally.


This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed. Principal, yield and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, one may receive more or less than originally invested.


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