Image Credit: Roger Hsu, “Black Monday” (Wall Street, New York City, 1987), via Flickr
By Jason Zweig | Sept. 29, 2017 12:52 pm ET
Next month is the 30th anniversary of the crash of “Black Monday,” Oct. 19, 1987, when U.S. stocks dropped nearly 23% in a single day. My “Intelligent Investor” column this weekend looks back at the crash; here are some additional thoughts from (and about) people who lived through it.
Peter Low, a trader on the floor of the New York Stock Exchange, had started his career there just before John F. Kennedy was assassinated. On that day in 1963, he recalls, “there was this groundswell of noise and mayhem that came up out of nowhere on a quiet, orderly afternoon.” But that was nothing compared to Oct. 19, 1987.
On Black Monday, Mr. Low kept getting orders from an institutional client to sell stocks, not a couple hundred shares at a time, but in huge blocks of tens of thousands of shares.
He remembers racing back and forth across the trading floor to sell Tandy Corp. (then the parent of RadioShack) in 50,000-share lots. Every time he got back to his post, the phone would ring again with another order to sell 50,000 more shares of Tandy.
“It was relentless,” recalls Mr. Low. “There was no letup. The sheer volume of selling was terrorizing. The pressure of doing so many orders all telescoped into such a short period of time filled us all with the fear of making a mistake. My undershirt was dripping with sweat.”
Only when the closing bell finally rang did Mr. Low realize that he had yanked open his necktie for the first time in 24 years on the job and that he hadn’t been to the bathroom since before 9:30 a.m. “The physical fatigue I felt,” he recalls, “was overpowering.”
Mariko Gordon, then a young analyst at the Royce mutual funds, marveled as her boss, portfolio manager Chuck Royce, stood at the firm’s trading desk buying all day long as the panic spread. That suffused her with a sense of “calm” in the market storm, she recalls.
She got a shock when she came out of the subway that evening and saw the sidewalks of New York’s Upper West Side full of young traders and investors “with this bummed-out, shellshocked look in their eyes, like people who are fleeing some kind of natural disaster.” Only then, she says, did the enormity of what had happened hit her.
Even to conservative investors, the crash came “as a complete shock,” says Jean-Marie Eveillard, then the portfolio manager of the SoGen International Fund (today known as First Eagle Global Fund). “I’d already been in the business for 25 years and I’d never seen something like that, a market dropping hundreds of points at a time and people selling instead of buying as stocks went down.”
As the market fell and kept falling, he says, “It was like looking into a bottomless pit.” Mr. Eveillard sold nothing that day, but he didn’t buy either. He was reluctant to step up until he understood what was going on. Once Mr. Eveillard realized that portfolio insurance — automated programs that sold stocks as prices dropped — was partly responsible, “we bought a little in the following days, but not as much as we should have.”
Did people see the crash coming? Not exactly.
The preceding Friday evening, Oct. 15, 1987, on Louis Rukeyser’s public-television show “Wall Street Week,” fund manager Martin Zweig had made a stark and disturbing prediction.
“I haven’t been looking for a bear market per se,” Mr. Zweig said grimly. “I’ve been really in my own mind looking for a crash.” He added, “But I didn’t want to talk about it publicly, because it’s like shouting ‘fire’ in a crowded theater.”
To this day, Mr. Zweig (who died in 2013 and to whom I’m not related) is widely credited with “calling,” or predicting, the crash. After all, it took place the very next trading day.
But if you keep listening to his remarks on the Rukeyser show, his call becomes more ambiguous and less miraculously clairvoyant.
Immediately after telling Mr. Rukeyser that he was looking for the market to crash, Mr. Zweig added that “early next week I expect a violent rally,” followed by at least two more upswings “within the next month or so.” Early the next week was violent, all right, but not to the upside. And that series of rallies never materialized, either.
Furthermore, Mr. Zweig told The Wall Street Journal’s “Heard on the Street” on Oct. 19 that the crash could spell the end of the five-year bull market and the onset of a long bear market. In fact, the S&P 500 went up 16.6% in 1988 and another 31.7% in 1989.
“It was interesting to see how many people were totally shocked when the crash happened,” says Eugene White, a financial historian at Rutgers University. Decades of relatively placid markets had led many investors to conclude that the regulations enacted in the 1930s had made investing safer. “People were sure 1929 could never happen again,” he says.
Prof. White worries that the Dodd-Frank regulations imposed after the 2008-09 financial crisis have lulled many investors into a similar complacency. A crash at least as severe as 1987 “could easily happen again,” he says.
That’s because “any market system can get overwhelmed” by panic or an unexpected spike in trading volume, says Barrie Wigmore, a financial historian and retired partner at Goldman Sachs. When that happens, investors don’t know whom to trust. In 1929, 1987 and again in 2008 and 2009, worries about the liquidity and solvency of trading partners tipped the markets into panic. “Counterparty risk is the weakness in any system,” says Mr. Wigmore. “There’s always a gap between you and the person you’re trading with and the potential for doubt on whether they can live up to the transaction.” Sooner or later, he says, “you can’t avoid that.”
It was, in fact, First Options Corp., an obscure trade-clearing unit of Continental Illinois National Bank in Chicago, that turned out to be the weak link in 1987, says Diana Henriques, author of the new book “A First-Class Catastrophe.” Traders, fearing that First Options wouldn’t be able to settle the massive volume of index trading that was passing through it, yanked cash out of the firm — endangering the ability of options to trade at all at a time of market panic.
“This is why you cannot write a rulebook for preventing the next crash,” says Ms. Henriques. “Who would have picked First Options Corp. as the company that absolutely had to be saved on Black Monday? No one in Washington, and not even a lot of people on Wall Street, had ever heard of it.”
Regulators did ultimately facilitate a rescue of First Options, and the Federal Reserve flooded the market with liquidity, keeping the crash of 1987 from turning into a deeper and longer bear market.
But “I would be astonished if we’ve managed to repeal the market cycle,” says Ms. Henriques. “How severely and rapidly it will fluctuate is a function of people’s emotions. It is human nature to panic, or to freeze or flee, if we can’t understand what dangers we’re suddenly facing. Human nature can’t be repealed.”
Were you on Wall Street during the 1987 crash? What’s your most vivid memory of it? What lessons did it teach you? Tell us in the comments, at intelligentinvestor@wsj.com or on Twitter @jasonzweigwsj.
Source: The Wall Street Journal, http://on.wsj.com/2fVKSm3
For further reading:
Books:
Definitions of BEAR MARKET, CRASH, PANIC, REGULATOR in The Devil’s Financial Dictionary
Chapter Seven, “Fear,” in Your Money and Your Brain
Chapter Eight, “The Investor and Market Fluctuations,” in The Intelligent Investor
Diana B. Henriques, A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History
Fred Schwed Jr., Where Are the Customers’ Yachts?
