1987 was a banner year. Irish rock band U2 released “With or Without You,” their first to reach number one in the United States, on March 16. The first episode of “The Simpsons” aired as a short on The Tracey Ullman Show on April 19. On July 17, the Dow Jones closed above 2,500 for the first time. The city of Philadelphia celebrated the 200th anniversary of the Constitution on September 17.
Then on October 19, Black Monday, it all came crashing down. Literally. The 1987 stock market crash saw the Dow fall 508 points, a decline of 22.6% in just one trading day. From top to bottom, stocks fell 33.5% in about three and a half months, with the bottom coming in early December—about six weeks after Black Monday.
Typically, those types of losses occur over a more extended, more drawn-out period. The worst of the 2008-09 subprime mortgage crash, for example, lasted nearly seven months, during which time the S&P plummeted more than 46%. But from start to finish, that global recession-fueled crash lasted roughly 17 months, the first 10 of which were more like a slow trickle before it became a full-on geyser in September 2008. The pandemic crash, on the other hand, lasted roughly a month from top to bottom.
While today’s inflationary environment and a ground war in Europe might seem unprecedented, and in many cases, it is, this is not a unique situation for the stock market. It is true that there are many unknowns, and the future is anything but set in stone. However, the market is governed by human beings making decisions, with all the emotions that go into that—and human nature hasn’t changed despite everything else that has.
The aftermath of the 1987 stock market crash
The economy eventually bounced back after the 1987 stock market crash, and has come back after every other crisis in the intervening decades (the S&L Crisis, Gulf Wars, a currency crisis, the popping of the internet bubble, 9/11, the 2008 financial crisis, the pandemic).
The upshot of all this is that if you have a proven system, you can succeed in any environment … even those that seem one-of-a-kind. What does that system look like? First off, these are the times you need to focus on what you can control—instead of guessing when a bottom will happen, follow the system. In our case that means holding plenty of cash, limiting new buying, and selling losers and laggards, while giving any resilient stocks a bit of rope. It’s simple, but it works.
And in case you would like some proof, consider this: If you invested in the market index at the highs in 2007 and just left it there without adding a dime, just ahead of the worst financial crisis since the Great Depression, that investment would have appreciated 197% by today for an average annual return of about 13%. And that’s with the worst timing possible. If you added more money along the way you would have done much better.
The market trends higher over time.
5 Lessons from the 1987 stock market crash
Like any market downturn, the 1987 stock market crash was a scary time for investors. But looking back, we can see that there are plenty of ways to limit and recoup your losses. Here are some of the takeaways from that year:
- Don’t worry about what everyone else is worried about; that’s already been discounted by the market.
- Trouble tends to come from where it’s least expected. In the 1987 stock market crash, it was the computer programs.
- Just as a bouncing ball experiences progressively smaller fluctuations, so will the market generally experience gradually reduced volatility in the days after a high-volatility crash.
- At some point, bargain hunters will take control. And then anyone still worrying about the conditions that caused the latest troubles will be left behind by a new bull market.
- The key to success, as always, lies not in predicting what will happen, but in tuning out the noise, focusing on what matters (the action of key indicators and the action of your own stocks), and using a proven system of investing such as you’ll find in our Cabot advisories.
The most effective ways to cope with a possible recession, however it unfolds, include reducing debt, building cash, and living within your means. And that’s a good lesson for any economic conditions.
Did you have money in the market in 1987? What lessons did you take away from that crash? We’d love to hear your thoughts in the comments below.