Wednesday saw the major stock indexes posting record highs, with the Dow officially crossing the 23,000 benchmark. This made it the fourth 1,000 point jump this year alone.
However, Thursday saw a slump in the stock market. European political tensions, not-so-great Chinese economic progress reports and the anniversary of the 1987 stock market crash were the reasons cited by analysts for the slight blip in an otherwise stellar week.
While the Dow still stayed above 23,000 points, at 23,132 on Thursday’s trading, the index was lost as much as 100 points during the day.
The S&P 500 was also down by 2 points (0.1%) at 2,559. Five of the index’s 11 sectors were trading low, especially the technology and consumer staples sectors which were down by about 0.6%. However, two of the S&P 500 sectors – telecoms and utilities – were up by 0.9%. The Nasdaq also dropped by 31 points (0.5%) to at 6,593 points.
One of the biggest downers was the anniversary of Black Monday – the 1987 stock market crash. On October 19, 1987, the US stock market saw the worst crash in its history. The Dow swan dived by 508 points (23%) leading to a frantic selling frenzy which snowballed into a massive crash across the world. The S&P 500 also dropped by 20% that day.
According to Analysts
A lot of market participants are wondering if the stock market is heading for another such meltdown as comparisons are made between the situation leading up to the 1987 market crash and today. Analysts say that while the markets aren’t as “stretched” as they were in 1987, a downward movement is overdue. According to them, the S&P 500 has had a 240-day run without a draw-down of more than 3%; in 1987, the record was 241 days before the crash.
However, a deeper dive into the two situations lends some comfort that it is not the same. For one, the current bull market is 103 months old. The 1987 bull market lasted barely 60 months.
Currently, the market is going through a growth phase, but it is measured and steady, with not too much volatility. In 1987, there were already signs of danger well before the stock market crashed. The S&P 500 peaked 2 months prior to the crash and had even dropped by 16% just 3 days before Black Monday. The signs were all there to see if someone had just looked.
When the markets crashed in 1987, the Dow’s 508 point drop would be equivalent to a more than 5,000 point drop in today’s market. And the S&P 500’s 20% drop would mean more than 500 points off the index now.
Today, the main concern that worries analysts is the complexity of the current market structure. In 1987, the main reason for the crash was the transition period that the market was going through. The stock exchanges were manned by humans and computerized trading was just being introduced. There was a lot of chaos in the transition. Now, human intervention is minimal and most markets are all about algorithms and data analytics.
Today’s stock exchanges also have another built in safety mechanism that if there were a freefall, then the day’s trading would be temporarily halted to prevent further losses. This failsafe did not exist in 1987.
The grey areas are that today’s market is so much more complex than in 1987 with so many parameters that no one is really sure what would happen if there was a meltdown like the one 30 years ago.