Today is the 28th anniversary of Black Monday, when the Dow Jones Industrial Average dropped 508 points in one day back in 1987.
At the time, that was the largest point drop in the Dow in history. Now, in terms of point drops, it doesn’t even rank in the top 10. Back then, the Dow was trading at around 1,700. Today, it’s just over 17,000. But the Dow’s 22% drop that day still ranks, 28 years later, as the biggest tumble in stock market history. The next largest percentage point drop, from mid-October 2008, is less than 8%.
Nevertheless, Black Monday, and the 2008 drop, has been on investors minds lately. That’s because October is often the month when the market experiences its biggest drops. A rocky market in August and September seemed to set the stage for another big drop this October. Reinforcing that belief was the fact that China was slowing, U.S. corporate profits have been shrinking, and bond markets suggested that U.S. corporate borrowers were taking on riskier bets than many people had originally thought. Indeed, the market drops in August and September seemed to signal that the economy was worse off than it seemed.
But so far, October has turned out to be a relatively pleasant month for stocks, as I predicted it might be. The market is up 5.5% so far this month. The biggest point drop this month took place on October 14, when the Dow fell by 157 points, not even a 1% point drop.
Perhaps the biggest reason the stock market has rebounded is the Federal Reserve, which looks likely to hold off on an interest rate hike until next year. Rising interest rates are typically bad for stocks and they can slow the economy, so investors have been cheered by the fact that the Fed appears to be on hold. As for the economy, September’s job growth was disappointing. But since then, the economic data was been pretty good.
That shows, once again, that while the economy and the stock market are closely related, they don’t always move in tandem. Black Friday, for instance, did foreshadow the economic slowdown of the late 1980s and early 1990s. But while it was by far the largest percentage drop in the Dow, the recession that followed was relatively mild. The most recent drop in the market may turn out to be nothing other than a market event.
Still, the more signs that the economy is improving, the more likely the Fed will go ahead and raise interest rates, spooking investors once again. Given that dynamic, it’s hard to see the market climbing much higher. But the fear that we were due for a plunge this October seems to have been overhyped.
