October 19, 2013
EVERYTHING BUT THE LESSON:
The Lessons of 'Black Monday' : The 1987 crash seemed catastrophic at the time but didn't derail the long-term investor (MATTHEW BANDYK, October 19, 2007, US News)
Two decades ago, on Oct. 19, 1987, the Dow Jones industrial average plunged 508 points. The 22.6 percent decline is still the stock market's biggest one-day loss ever in percentage terms, equal to a 3,200-point drop today. At the time, Americans were dealing with a falling dollar, a new Federal Reserve chairman, and a global war (albeit a "Cold" one) that bred uncertainty. Looked at that way, October 2007 sounds eerily similar to October 1987. So what should today's investor know about "Black Monday," 1987?
The important facts about the 1987 crash are that the new Fed Chair had been forced--by the nature of the job--to hike rates at the start of his term to show that he would be hawkish about inflation. Of course, he did this into the teeth of one of the great deflations the world has ever seen. His response to the crash was, naturally, to aggressively lower rates down towards where they should have been in the first place. Ben Bernanke repeated the mistake, precipitating the Great Recession. Now comes Janet Yellen, accused of being an inflation dove.....
Posted by Orrin Judd at October 19, 2013 7:14 AM