Investing

What market veterans learned from the crashes of 1987 and 2008: 'This will be transitory'

Twenty/20

Normally, it might take the U.S. stock market several months to rise or fall by at least 9%. But through Monday, the S&P 500 posted daily moves of at least that much for three straight days.

In what's proven to be an especially raucous four weeks for investors, all of the major U.S. benchmarks have tumbled into bear markets, defined as declines of at least 20% from recent highs. And on Monday, both the S&P 500 and the Dow Jones Industrial Average posted their third-worst daily declines in history.

Fears about the novel coronavirus are to blame for the market's nearly 28% slump since February, both in terms of the potential health implications and pace of economic growth. Even though the Federal Reserve has taken swift and unprecedented action, slashing interest rates to near zero and pledging to boost trillions into the economy, it's done little to calm the markets. 

"We are in an unknown that we cannot quantify yet," says Rich Steinberg, chief market strategist at The Colony Group. "However, we know that over time, this will be transitory."

VIDEO1:5701:57
The difference between a bear market, a recession, and a correction

Video by Courtney Stith

Comparing the current market with prior crashes is "very tricky," says Eddie Perkin, chief equity investment officer at Eaton Vance. That's because while there are comparable periods in history that saw similar uncertainty with respect to economic growth or volatility in the stock market, there aren't when it comes to the daily life and well-being of Americans.

"The public health aspect of this has no good precedent, really," Perkin says. Until there's more clarity on that front, the advice he's giving his team is: "Don't get sucked into the conversation about where is the bottom, because no one knows."

Still, veteran investors have endured worse, and the market has always recovered. Two prior bear markets, one in 1987 and the other in 2007-2009, are getting a lot of attention lately. Here's how what's happening now compares and some lessons professionals learned from those crashes.

Black Monday and the market crash of 1987

Between August and September of 1987, the S&P 500 tumbled more than 33%. One particular day — October 19, 1987, also known as "Black Monday" — was especially brutal, with both the S&P 500 and Dow average tumbling more than 20%.

That date has now become a timely reference point. On two different trading days this month, March 12 and March 16, both benchmarks posted their worst daily declines since 1987.

Back then, stocks were selling off because of a potential tax on mergers. Declines were exacerbated by electronic trading in an era before the protective measure known as circuit breakers, or brief pauses in trading. (For the third time in a week, on Monday, sharp declines in the U.S. stock market triggered those circuit breakers, which helped Wall Street reset.)

The 1987 bear market didn't overlap with an economic recession, defined as two consecutive quarters of declines in gross domestic product (GDP), or the sum of the value of all goods and services produced in an economy.

The S&P 500 didn't return to its pre-crash level until July 1989, but it finished that year up nearly 27%.

The 2007-2009 financial crisis

Of more immediate relevance is the last bear market in U.S. stocks which occurred between October 2007 and March 2009. During that time, the S&P 500 plummeted nearly 57%. 

The declines during that particular bear market weren't as fast and dramatic as what's happening now. The single-biggest daily decline the S&P 500 experienced in that time frame was on October 15, 2008, when this gauge fell 9% amid fears about a U.S. recession. 

Those fears proved to be accurate, as the U.S. economy experienced its longest contraction, clocking in at 18 months, since the Great Depression.

The cause of both the economic and market meltdown during that time was the collapse of the global finance system fueled by reckless mortgage lending.

The S&P 500 finally returned to its 2007 levels by early 2013, about four years after it hit bottom. That was an especially long time; on average, this index has recovered in about 22 months from the 12 bear markets since World War II. However, the bull market that began in 2009 ushered in one of the best decades ever for investors.

Lessons learned from past market crashes

If this is the first time you've experienced this type of market slump, it can be unsettling. And even if veterans on Wall Street believe some elements make this time unique, they agree that there's opportunity for long-term investors.

That's because the market has always bounced back, which is a lesson Steinberg learned early in his career. In October 1987, he was one year out of school and working at a brokerage company. Even as the major benchmarks plummeted, rather than succumbing to fear and selling, Steinberg and his colleagues were buying stocks.

"This is where people's emotions get tested to the limit," Steinberg says. "And when the desire to sell to go to cash so that you physically feel better exceeds the rational view that unless you need the money immediately, you're better off waiting through these cycles and looking for opportunities."

Similarly, Perkin says that long-term investors with extra cash should consider investing, even if that means you'll have to "hang tight" in the likelihood of continued market volatility ahead.

And, he adds, it's important to focus on three basic rules of investing: Diversify your portfolio to include a mix of different assets, dollar-cost average to spread out your purchase price over time, and rebalance to ensure your portfolio aligns with your risk tolerance.

Finally, even though professional traders are fearful, as evidenced by spikes in a gauge of volatility known as the VIX, that doesn't mean you should be, Perkin says.

"You don't want to look back a year from now and say, 'Why did I sell at the bottom?'" he says. "Be safe with your health; be bold with your investment decisions."

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