Spread Thursday , 20 October 2022
5 minutes reading
[size=13][ltr]Credit: Scott Olson / Staff getty images[/ltr][/size]
Probably not, the Dow was down 22.6% that day, a date that has since been immortalized as Black Monday. To put that in context, any drop of this size would be close to 7,000 points based on the current levels of the Dow Jones Index. In 1987, that drop was 508 points.
What's going on: Rules have been in place since 1987, such as a trading halt to prevent a drop of this size from happening again.
Since then there have been some so-called stock crashes but none close to what was seen on Black Monday, when inflation was 3.6%, George Bush (first) was the Republican presidential candidate and a gallon of gasoline was 89 cents.
It was clearly a panic sell-out. CNN Business spoke to John Hertel, a broker at Goldman Sachs in 1987, to get his testimony on Black Monday.
Hirtle, now CEO and founder of Hirtle Callaghan, a wealth management company with about $20 billion in assets, said Black Monday was a "deepest moment, what a moment" on Wall Street. The normal mechanisms of trading simply stopped working.
"You couldn't get a quote," Hertel said.
It is also important to remember that in 1987, most trades were actually transacted on the floor of the exchange, Hertel added. This is now mostly done electronically. This has led some old Wall Street veterans to derisively refer to the New York Stock Exchange as little more than a television studio.
"The circumstances that led to that in 1987 have changed dramatically," Hertel said.
The return of alarming sign speculation?However, there are some similarities between now and 35 years ago.
For example, stocks (before their decline in 2022) were trading at historically high valuations. There is a lot of speculation in the market at the moment, with traders betting on “meme” stocks like GameStop, AMC, Bitcoin and other cryptocurrencies as well as other speculative investments.
Many investors counted 1987 on the continued rise in corporate mergers.
There appears to be more risk these days, Hertel said: "There is no doubt that there is more gambling in the markets now."
Hertel also noted that while interest rates are now moving higher thanks to a string of recent Fed hikes, they are nowhere near 1987 levels. The 10-year Treasury yield is currently around 4%, compared to roughly from 10% before the Black Monday incident.
But there is another big difference between now and 1987 that may be more serious. Black Monday turned, in hindsight, into a fleeting picture of a strong bull market and strong economy during the Reagan years.
final resultHowever, the current wave of market volatility is a worrying sign and a potential harbinger of a recession. That could mean more downside in the future for stocks.
“The big problem we have is whether the earnings forecast for next year are correct,” said Marco Berundini, head of equities at Amundi US. ."
Berundini, who has been with Amundi since 1991, added that although interest rates remain historically low, the speed and scale of the current hikes are unprecedented. The Fed could end up breaking something in the markets or the economy. He continued, "It is difficult to predict the consequences of the Fed's tightening."