October may not be the cruelest month for investors -- based on the averages, that's September. But when Wall Street stumbles at this point of the year, it stumbles extra hard. And that's why Alison Southwick and Robert Brokamp picked October for a four-part series on the history of market crashes in the United States.
In this podcast, guest and Former Fool Morgan Housel leads the discussion as they reflect on two major economic tumbles: the long downturn of the 1970s and 1987's Black Monday. And looking back, Housel offers a couple of important takeaways investors should learn from those tumultuous economic times.
A full transcript follows the video.
This video was recorded on Oct. 10, 2017.
Alison Southwick: All right. I feel like you have already given us a takeaway lesson. Do you have a final thought?
Morgan Housel: No disco. No polyester. That's the main takeaways from this.
Robert Brokamp: Polyester, no; disco, yes.
Southwick: I think you're the only bull on disco.
Brokamp: Maybe I'm going to start singing some Abba songs.
Housel: I think a takeaway from the '70s is the extent to which interest rates and inflation drive stock market valuations. And if people ask why the stock market has done so well in the past eight or nine years, it's because interest rates have been low and stayed low, and that's made stocks really attractive compared to bonds, which is the main competition for investors' money.
Just a couple of days ago, Warren Buffett was on CNBC, and he said if he could have just one piece of information that was going to tell him what stock prices were going to do over the next 10 years, it's what interest rates are going to do over the next 10 years. If you know what interest rates are going to do in the future, you have a pretty good idea of what the stock market's going to do. It's really either the anchor or the fuel that's going to move what stock prices are doing.
And that goes again, too, for the next 10 years. What is going to break the stock market rally and cause the markets to plunge? There are several things, but almost certainly it would be if interest rates start rising. So that's the big takeaway from the 1970s.
Southwick: And the '80s?
Housel: From the '80s I think it's two things. It's again, as I mentioned, the disconnect between the architecture of the stock market and the functioning of businesses that you're investing in. It could be two completely different things, and sometimes those things get 10 miles apart, like they did in October 1987, where there was no connection between what profits businesses were earning and the 20% crash in one day.
And I think just keeping that in mind and always focusing on the business you're investing in versus the day-to-day actions of the stock market, even when it's enormous, is incredibly difficult for people to do, but it's one of the most imperative skills as an investor.