You Call That a Crash?
Ten years ago this week, half a trillion dollars vaporized in a single day. Oct. 19, 1987, was "Black Monday"--the day one brokerage, so the joke goes, told its clients to start investing half their money in bonds, half in canned goods. What caused the crash? Ten years later, no one can agree. Maybe it was worries about the dollar. Maybe it was rising interest rates. Maybe it was antitakeover legislation in Congress. But maybe it was nothing more complicated than an over-inflated market bubble finally bursting.
That was 6,000 Dow points ago, and however frightening Black Monday was at first, America today appears to have embraced the theory of the Great Never-Ending Bull Market. In the past decade, billions have flowed into mutual funds every month come hell or high interest rates or Fed Chairman Alan Greenspan, who last week again warned that current growth is "unsustainable." The Dow's 508-point drop on Black Monday was twice as large in percentage terms as the infamous crash of Oct. 29, 1929, which so dramatically declared the onset of the Great Depression; yet Black Monday's lesson, if any, for '90s investors seems to be that crashes are at worst a chance to buy cheap. A new Harris/CNBC poll finds that 71 percent of Americans say a market crash would not cause them to alter their investment strategies; 12 percent say it would be a reason to buy stocks.
By now, pretty much a whole generation of investors has suffered through no worse a financial crisis than that day 10 years ago. Many didn't even suffer through that one: An amazing 92 percent of all money in stock funds today was invested after 1987, and by one estimate half the people owning stock today owned none in 1990. Amnesia will soon be further abetted: The all-important 10-year records of mutual fund performance will no longer reflect the crash.
It's bunk. One school of thought, of course, insists that history doesn't matter in today's market. With inflation under control and new technology driving the economy, says economist Edward Yardeni of investment bank Deutsche Morgan Grenfell, the Dow should soar to 15,000 by the year 2005. Maybe you'll be safe as long as you follow the slow-and-steady ways of multibillionaire Warren Buffett, who has quipped that his favorite holding time for a stock is "forever."
But maybe it's at least worth remembering on this anniversary what a real crash looks like. From 1929 to 1932, the Dow industrials fell 89 percent. It wasn't until Nov. 23, 1954, that the average made a new high. There are huge differences between now and then, but one huge similarity also stands out: Like today, investors in the 1920s saw the stock market as a perpetual wealth-creating machine. Among the more notorious purveyors of this view was John J. Raskob, a General Motors executive. In an August 1929 interview with Ladies' Home Journal, Raskob claimed America was on the verge of a boom and everybody ought to be in the stock market.
Or if 70 years ago is too much of a strain for the historically myopic to focus on, how about the great bear market of 1973-74? For two years the Dow tumbled, losing 45 percent of its value. Adjusting for inflation, the Dow actually peaked in 1966 and did not post a new high until 1985. Back in 1969, even Buffett was so worried about the market that he liquidated his investment fund and offered to help his former partners make bond investments. Buffett is dabbling in bonds again. He is not reported to be stocking up on canned goods--yet.
This story appears in the October 20, 1997 print edition of U.S. News & World Report.
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