Macro Economic Trends and Risks
Looking Back At October, 1987

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By sonnypage
October 15, 2007

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The twentieth anniversary of the October, 1987, crash, Black Monday, is next week. Back then a much younger Sonnypage was a financial consultant in one of Merrill Lynch's Atlanta offices. I can offer you more than just a few faded memories of the event because I then kept a personal journal. So here goes, some journal entries along with a few of those memories. The week before Black Monday had been pretty rough. I had taken most of the weekend to reflect and here is what I wrote on Sunday afternoon, October 18, 1987.........

"I have had most of the weekend to reflect upon last week's action in the stock market. Friday's close was at 2246 (DJIA), down 108 for the day on 338 million shares. This was a record point drop on record volume but not a record percentage drop since it was only 4.6% vs. 12% on "Black Tuesday" back in October, 1929. Still, it was 10% in three days and a 17.42% correction from the high of 2720 back in August. Is this the beginning of the crash of 1987 or merely a breathtaking correction in an ongoing bull market? The continuing weak dollar emphasized by the August trade deficit of $16.4 billion released Wednesday is raising inflation fears, which is pushing interest rates up, which is increasing the likelihood of a recession in 1988, an election year. President Reagan still holds at least one strong trump card; Alan Greenspan is the chairman of the Federal Reserve. The phones will be ringing tomorrow morning. I am advising my clients to hold, not sell. Tonight we are going to Chastain Park with two other couples for the James Taylor concert."

Monday was the crash of course and while I have few distinct memories of the day itself I do have these two clear memories from after the close. Our manager called all of his brokers back to the conference room. It was as quiet as a tomb; you could have heard a pin drop. The manager essentially gave us a pep talk, your clients need you now more than ever, be talking to them, but I remember no guidance on what we should be talking with them about, what we should be advising. We could all only guess as to what might follow. Then, driving home that night, I had this strange feeling as I watched other cars and the people in them. Did these people not know that the world as we knew it had just ended? All I could think of was the 1929 crash and the depression that followed. Was that what we now faced? The rest of the week must have been very busy because I did not write in my journal again until Saturday, October 24, 1987.........

"The Crash of '89, what a difference a week makes! We were down 500 plus points on Monday on 600 million plus shares. Most of my stock accounts are down about 30% from where they were only a month ago, including our own personal accounts. I spent the morning in the office and am pretty much caught up on paperwork."

Then, a few days later, on Wednesday, October 28, 1987, I wrote.........

"Is this an incredible buying opportunity or the last chance to get out, or neither of the above? Our Merrill Lynch analysts think the downside risk here is very small and look for the market to retrace one third to one half of its loss over the next two to four months....then what? I noticed that the Shearson analyst and their chief economist were both extremely bearish two weeks ago. Apparently, most Shearson/ Robinson Humphrey brokers and their clients were mostly cash before the crash. I don't believe that Merrill Lynch, because of its size, could ever just say sell. I have held and not sold as I continue to advise my clients."

So what was the crash really all about? I have read various explanations over the years none of which really seemed to ring true. I have just finished Alan Greenspan's The Age of Turbulence and here is what he had to say on the 1987 crash. Looking back twenty years later this sounds about right to me.

"Yet the theory of efficient markets cannot explain stock market crashes. How does one make sense of the unprecedented drop (involving the loss of more than a fifth of the total value of the Dow Jones Industrial Average) on October 19, 1987? As a newly appointed Fed chairman, I was watching the markets very closely. What new piece of information surfaced between the market's close at the end of the previous trading day and its close on October 19? I am aware of none. As prices careened downward all that day, human nature, in the form of unreasoning fear, took hold, and investor's took relief from pain by unloading their positions regardless of whether it made financial sense. No financial information was driving those prices. The fear of continued loss of wealth had simply become unbearable."....p.465, The Age of Turbulence, Alan Greenspan

Could another great crash like the one in 1987 ever happen again? Of course not.... unless, that is, you believe that human nature never changes :-)