Lessons Learned from 1987’s Black Monday

Welcome to "The Informed Investor," where we break down the latest financial headlines, bringing in research and insights, to help you separate the news from the noise. Welcome to "The Informed Investor," a show brought to you by Dimensional Fund Advisors, a global asset management firm bringing financial science to investing. Today's topic is a reflection on Black Monday, the market crash of 1987. I'm Mark Gochnour and I'm joined today by Jake DeKinder and Wes Crill. Now guys, couple things here, when we look at Black Monday, that was October 19th, 1987, and remember, we were prepping for this, and I go, now what day was that? Oh, Black Monday, oh yeah, that's right. You got there eventually, man. You know, it just takes you a couple extra seconds. A little slow, a little slow. I still thought it was a sale at some retail shop, like Black Friday? No, that's Black Friday. Yeah, okay, all right. All right. Now Black Monday, so Monday, October 19th, 1987, markets were down around 20% that day. So just imagine that you got a million dollars in stocks. In the end of the day, you've got $800,000. Like massive, massive drop. What do you guys think about a day like that in the market? Well, fortunately, I was busy gluing macaroni on construction paper because I believe I was in kindergarten that day, but I mean, it seems like in my experience from watching the movie "Wolf of Wall Street," seems to indicate that was a very rough day in markets. And just looking back at this, so this is crazy, if we go back to July of 1963, so we got this daily return data for Fama-French indices, that was the 15,625th worst day out of 15,625 days over that stretch of time. So that's a pretty rough day in markets. Yeah. What do you remember about that day, Jake? My family's been in the business for a long time, so I do remember, it was definitely a stressful period during that. But yeah, I mean look, I think a 20% drop, you lose 20% of your wealth in a matter of one trading day, that's gonna impact you. By the way, a week later, you had another, actually, massive down day in the markets as well. So kinda that whole month looked pretty rough. Now, we should note, the markets were up pretty big leading up to that. You know, markets looked pretty solid coming through the first half of that year into summer, but then you get a lot of news that's coming out. We get a revised estimate of what our trade deficit is. You get comments about potentially trying to devalue the dollar. You know, there's a lot of factors that are going on, but I think it's always interesting that people anchor to that one day, they anchor to the 20%, but there was so much going on around that. Yeah, before and after that. Before and after. For sure. Completely. All right, let's hit a couple headlines here, and then we'll dive into this a little bit deeper talk, maybe potentially some causes, lessons learned, some things like that here. But let's hit these headlines. Okay, the first one, "Black Monday: The Improbable Crash, Its Causes, and Timeless Lessons for Investors." I feel like I just said that one. You just said that. I just said that. All right, here's the other one, Black Monday? "Black Monday? The S&P 500 Is Crashing Like It's 1987." Now here's the deal, I didn't tell you I was gonna read this headline, so I'm gonna make you guys pick the date. When do you think this headline came out? "Black Monday? The S&P 500 Is Crashing Like It's 1987." What do you guess? What day do you think that headline came out? I think, I'm gonna go, actually, I'm gonna go recently, I'm gonna go April of this year where we get a big announcement on the Wednesday afternoon Thursday, Friday, and it's still rough into that next Monday. My inclination was to go covid, but I don't think people would've been joking about it back then. So let's go with the dot com meltdown, back in '99. Jake, I don't know how you did it. Spot on. Oh boom, boom! You guys spend too much time reading news, that's your problem. You gotta get your hands dirty in the data and there's no time to read these news headlines. I get confused by the data. I'm a better storyteller. Well compare those, couple days. So we had those two days around the tariffs liberation day. Wasn't it, market was down around 10% over those two days? I think so, that Thursday, Friday, yeah. Right, and then again, Black Monday's 20% in one day. All right, one of the reasons we wanna reflect on Black Monday is it's coming up here in a couple days. I think there's a lot of investors out there, probably a lot of financial professionals too, perhaps, younger in their career, that haven't gone through a major event like that, because think about that for a moment. We did have covid. So that's not too long ago where I think it was the biggest drop we've ever seen in March. But to go back to then a significant time period, before that, you had to go back to the global financial crisis, right? 2008, 2009, what is that? 17 years ago. So somebody 37, they're in college probably that time. I probably don't remember too much about it, if you're chunking away at college. And then the crisis before that, the big one, would've been the tech bust. That's what you're alluding to there. Starting the century, in kind of 2000, 2001, 2002. And then before that, you had Black Monday in 1987. Yeah in '97 you got Asian financial crisis. So that one got pretty choppy for a little bit. There's some big ones, yeah, I guess there's some big ones around there- But no, you're right- In the nineties, but you know, I guess on average, you look at that on average, maybe every 10 years or so, you get some like big drop in the market like that. But I think it is a good time to reflect on some of those big drops, lessons learned from that, and have proper expectations as an investor when these things happen, and what do you do about it as an investor. So for me that's one of the reasons we wanna highlight this show around Black Monday. There were some elements around, you know, program trading that were taking place, you know, during October, through that weekend. I mean a lot of different factors were sort of circling around this. You actually can read more about it if you go to federalreservehistory.org, kinda gives a whole scenario. I do think it's helpful periodically to go back and look at these different events, what caused them. As we talk about, a lot of times, it's not always clear what caused 'em. You know, in hindsight people love to look back and be like, "Well it was X, Y, and Z that led to that." And while maybe one factor, normally there's like a series of factors around it. You know, real quick, the '87 one too is interesting in that we learned a lot about maybe how we might want markets to function as well. 'Cause coming out of '87 is when you start to have some of the circuit breakers that are put in place that say, hey, if you get a drop of, you know, 7% or so, let's pause for a little bit. You get another drop, I think it's around like 13%, let's pause for a little bit, and actually, I think now if you get a 20% drop, I believe that trading is halted for the day. So we always want well-functioning markets. My point there is that we do learn as we go along of hey maybe there's some things that can be put in place that can help protect from a little bit of that sort of feeding upon itself of panic selling that does take place. Yeah, I mean the fact that the market is dropping is probably an indicator that maybe the market got worse news than an expected, and so investors are no longer willing to pay the same price they were before. And so you do want that in a healthy market. 100%, 100%, yeah, yeah. You don't wanna exacerbate it, so you know when you have restrictions around like short selling, and things like that that have come into play over time, I think those are useful ways to keep the market well functioning while, you know, still, again, not trying to exacerbate a crisis. It's always a balance, and we're not here to advocate for big time regulation, but I do think that there has to be some checks and balances that are in place. I find too, that the press, and I think most investors, you wanna simplify the world to say well this caused this, but it's not that easy. I mean there's so many factors going on around there. I mean you've probably done some reading around that. What are some of the things being talked about, potentially, that drove that day? Yeah, whether the market went up or went down big time, it's usually hard to figure out exactly what was driving it. You know, sometimes there are things you can point to. I remember, I probably mentioned this story before, but the very first TV interview I ever did, so it was back in November of 2020, and I was meant to go on there and talk about the election results. You know, remember that was the Monday after that election spilled over into the weekend, and they finally clarified that Biden had won the election on that Monday. And so I'm meant to comment on how there's not been a strong reaction, typically from markets at the conclusion of an election. And I look down and see that for example, U.S. value stocks are outperforming growth stocks by more than 6% on that day. And you look what else was going on in the world that day, well that was the day where one of the big pharmaceutical companies had announced the success in their trials of the covid vaccine, and I think everyone was starting to breathe a sigh of relief. And so on that day, you could probably say okay, well maybe this was what was driving the market's turnaround. But yeah, you look back historically at some of these market downturns, it was not necessarily obvious and you couldn't pin it on one particular factor. And that makes it hard to predict, right? We always talk about okay, what is the likelihood that we think we're gonna have a market downturn? A lot of people spend a lot of time concerned about that. It's very difficult to predict because even with the benefit of hindsight, you might not be able to say exactly why something happened. Well and also if you had the same facts and circumstances that was in place, you know, seven years later, 10 years later, whatever it is, the market might react to it very differently. And I like to point to, you know, the first time U.S. debt got downgraded, back in August of '11. In the U.S. markets, we get downgraded, the debt, August and September are pretty rough in the markets. October actually came back pretty well. Now you fast forward 10 plus years later, we've gotten recent downgrades of the U.S. debt, and I mean, I don't wanna say it was a non-event, it's still a big deal, but in terms of the market's reaction, it didn't look like it looked in 2011. Well you were getting into lessons learned, just a minute ago, you're like, you can't really predict these major events or major days. So we'll talk about that. But just to set that up, going back to 1987, so we had that huge day. Jake, I think, was a week later the market was down another- I think it's a following Monday. Eight 9%? Yeah, something like that. It might have been six or seven, somewhere around there. So you see this massive volatility in some of these challenging time periods, both up and down during those time periods. But the year ended a positive for 1987. I think it was up 5.2% for the calendar year. So again, going back to this idea, if you go back and look over time, and you think well it was a nonevent that year. It was anything but. It just sort of ended up slightly positive for the year. For me in 2020. Yeah you get some of these big market downturns, again, we always talk about the idea of staying disciplined, staying invested because you don't know when these market drops are gonna occur, but when they do happen, you don't want to compound the problem and then get out of markets and miss the rebound because, in some cases, that rebound happens very quickly after the single day drop. Well, and we're talking about single day drops here, but I mean do note that, and I think maybe we covered this in a previous episode, this is one that we like to talk about, that if you look over the last 40 plus years or so, you get about a quarter of the time where you get a drop of at least 20% during the year. Now that that's obviously not on a single day. These are like Black Mondays and out we're talking. I get that. But it is good to note that, you know, if you say well roughly about one in four years, at some point during the year, the market's down 20%. Like that gives you some perspective of this stuff does happen. Yeah, so there's a lot of volatility markets, huge price swings, and we've talked about this before. Again, you want that to happen in a well-functioning market, constantly- It's where we're getting paid the equity premium, right? It's not to have smooth sailing, it's to bear the risk and uncertainty associated with stock returns. So that's a big lesson. Another one for me is you just can't time it, but you just can't predict exactly when these things are going to happen. As much as you want to, there's just no way to know around that. And I also think too about when you get into some of these circumstances, that potentially, here's, we're reading about things that could be driving that particular drop, significant drop. Whatever you're worried about, it's already somehow reflected in the price, already. So maybe it gets worse, maybe it gets better, prices will adjust to that going forward. What are other, some of the lessons learned from some of those major days? I think just delving into that point you just mentioned, which is, you know, the concern itself doesn't necessarily have to be resolved in the world for the market to have moved beyond that contribution to uncertainty. Like covid one is a very good example where the markets started to turn around very quickly after that March downturn, but that didn't mean that covid went away. There were still concerns around that. It's just that that those concerns were reflected in market prices and it was really, once you learn something new, when markets would react to it. I think that's a good point. That's why it's so difficult by the way, to predict these things because you don't know what the news is gonna be in the future by definition. I think there's always maybe a little bit of concern about a looming crisis that's out there. You know there's a lot of stuff that's going on in the world. There's a lot of stuff that's going on in financial markets, and if you kind of search for it, you can always sort of, the potential crisis that might be out there, and when you're in it, it does feel like a really big deal. But one of the things you know we like to do is sort of ask people be like, so let's go back to, you know, 2020, you can remember it, that's covid, I got you, but you take people back to 2019, and be like, "Well what was a major thing you were worried about back then?" Like I don't remember. Go to 2018, 2017, but if actually, if you go and you start to look up some of the different events that were taking place during these years, it reminds you like, oh yeah, that was a really big deal, and in the moment, people were really concerned about it. You get four or five or six years out, you literally can't even remember what was going on. There's always something to be worried about. There's always something, yeah. There's always something to be worried about. I'm gonna read you a headline here, again. Let's see here. All right, this one came out in July of this year, July of 2025. The headline is, "What If This Time Really Is Different For Investors?" Now I think in there, it's probably talking about AI, but let's go back to this concept again of like to Black Monday, was it different? Yeah, absolutely. I think it was. I mean, I think we've hit on this quite a bit, that to me, it's always different, right? The events are different. There's no perfect blueprint. I mean it's just the world's dynamic, a lot of things are changing all the time. I just come back to, even though it's different, should you do something different? And that's where I always land. You know, we were talking beforehand, you were saying that, you know, I think you were referencing covid versus one of the other downturns that we had, and we said, well yeah but that one, there was a health element that was worked into it. You couldn't go out and see your friends or your family. You were kind of cooped up, so there was a social element to it as well, and yeah that was really different. But from an investment standpoint, should you have done anything different? No, 'cause that turnaround was crazy fast. Yeah, that's a good point. Yeah, that definitely felt different at the time. Unless you were in Texas or Florida where you could, you know, start going out to bars and restaurants two months into the pandemic, but you know, everyone else was stuck at home. I know- I like to prioritize bars. Before restaurants. Whichever one seems more irresponsible, sure. Well it does say, I mean we talked about this, but unless you have a better solution, which we're not aware of, stick to your plan. Have a plan in place, stick to it, stay disciplined, know your stocks, or your long term growth money, 10, 20, 30 plus years, around that. Well go look up all of these different events that we referenced there, right? I mean go look what a, either an all equity portfolio, or even a 60/40 looks like three, five, seven, 10 years after these major events, these major downturns, and for the most part, you look at those numbers and you're like, those are really good numbers. That would help keep me on track to my goals. And usually those big downturns come back. It's been different over different times, but those things come back, and you know, you get back to the conversation on all time highs again- That's right. And not too far after that. All right, last question for you guys. Prediction. When's gonna be our next 5% down day? There you go with the predictions again. What did I just tell you guys? I'm not in the predicting business. I have absolutely no clue. I do know that if you wanna be an investor for the next 25, 30, 40 years, no guarantees. There's a decent probability you will see periods of high volatility. There's a decent probability that you're gonna see some massive drops in the market. Maybe it takes place over a month, maybe it takes place over a single day, but hopefully a lot of the things that we're talking about here you come back to, and be like, "Yep, we've seen that before." And I do know that, for the most part, markets tend to come back. Yep. If I could predict it, it would be sort of like that experiment you ran back in the day, the perfect market timing strategy, where you would grow a dollar into tens of billions of dollars if you just knew when the market downturns were gonna happen. So I wish I did know. I could be very wealthy really quickly. We should bring that perfect market timing onto this. Those numbers are so fun. Yeah, let's do that as an episode. That'd be great. It's unbelievable, if you were able to get it right. That's right. The wealth you could create. All right, so that was October 19th, 1987. We are in October now, in the fall, and one of the topics that comes up quite a bit this time of year is looking at taxes. And by that I mean, you know, most asset managers are gonna come out with their estimates, their year end estimates for distributions, for their stock and bond funds. So it leads to that conversation of, hey, how do I think about tax efficiency as an investor? What are some of the key concepts I wanna keep in mind there? So let's come back again here on our next episode and dive into taxes. You're gonna totally geek out on that episode, Gochnour. I'm gonna love it. In fact, we're gonna switch chairs, I think, on that episode here. I think I have a prior commitment that day. I don't know when we're recording it. I think I'm busy. All right, so thank you everybody for joining us here today on "The Informative Investor." Be sure to tune in on the next episode where we are going to look at some tax efficiency. And with that, hit subscribe, and have a wonderful rest of the day. Thank you.