My Thoughts on Market Crashes, Mayhem, and More

Thirty years and four days ago, on October 19, 1987, the stock market crashed.

The Dow Jones Industrial Average plunged 508 points, or 22.6%. Those were the worst point and percentage losses in history. In fact, that plunge was almost double the size of the Black Tuesday crash on October 28, 1929. It would also be equivalent to a wipeout of more than 5,200 points today.

Bloomberg published a fascinating piece on that fateful day recently, one filled with personal recollections. Our firm’s founder, Martin D. Weiss, has shared his own memories with me and readers as well. Suffice it to say that anyone who lived and traded their way through that day still remembers it vividly.

Of course, my professional experiences with crashes and panics are somewhat different. I graduated from college in 1998, and went to work right away at a company that follows and analyzes interest rates, mortgage markets, and other related sectors.

Within weeks of me signing on, Russia defaulted on its debts, the Long-Term Capital Management hedge fund collapsed, and high-risk home equity lenders started going broke because their funding dried up. Then-Federal Reserve Chairman Alan Greenspan had to rescue the market with what was considered at the time to be massive amounts of liquidity, as well as three interest rate cuts in quick succession.

Not two years later, the dot-com bubble began to burst. Stocks of high-flying Internet companies that Wall Street once fawned over crashed and burned. The Nasdaq Composite Index ultimately lost 80% of its value, including in several trading sessions where stocks lost gobs of percentage points in only a few hours.

But in hindsight, what seemed like major panics and crashes couldn’t hold a candle to what we saw from 2007-2009. Bear Stearns. Lehman Brothers. Countrywide Financial. Washington Mutual. Even Fannie Mae, General Motors, and AIG collapsed entirely, or required bailouts totaling hundreds of billions of dollars. On September 29, 2008 alone, the Dow plunged 777 points – even more than it did on Black Monday in terms of points, though not on a percentage basis (7%).

Why do I bring this up? When times are good and volatility is low, as they are now, investors often forget how gut-wrenching and tumultuous market crises can really be. That’s why constant vigilance is necessary. It’s also why even during strong markets, I advocate focusing on stocks that pay generous dividend yields and that sport higher Weiss Ratings. That will help keep you from getting caught flat-footed if the unexpected occurs.

Many investors also fail to realize that every market crisis and volatility explosion is different from the ones that came before it. They’re triggered by different events, they unfold over different time frames, and they impact different asset classes in different ways.

Should you automatically “short” U.S. stocks just because we recently passed the anniversary of Black Monday? Or is that the wrong approach for the market “convergence” events that Martin and Sean have been warning about? Could we instead see even larger potential impacts in vulnerable government bonds, currencies, and foreign stock markets?

I’ve pored over their research, so much so that I think I know the answers – and am as ready as I can be for what’s coming. If you want those answers too, make sure you watch their recent emergency conference here. Then hop over to their blog to ask them any follow up questions you might have.

Why? Because when it comes to market crises, history doesn’t always repeat itself. But as Mark Twain reportedly said, it often rhymes! Being prepared for anything is your smartest move.

Until next time,

Mike