The one common trait in every bear market is fear. Today’s market is certainly no different, and it's impact has been exacerbated by the unprecedented nature of the economic response to the Coronavirus pandemic. In fact, the term “unprecedented” has been used quite often to describe various phenomena associated with the current times we are living in. To be sure, there are some unprecedented things going on, but examining the stock market, when we dive deeper into the numbers we can see that there is some precedence after all.
Between February 19 and March 20 of this year the Dow Jones Industrial Average fell 36%. While the last two bear markets (2000 & 2008) were both about 50% declines in total, it took over a year to reach those bottoms. The rapid decline in stock prices this year was alarming to all market participants. A decline of 35% over one month is a lot, no doubt, but it is not unprecedented. In October of 1987, the Dow fell 30% over a two-week period – 22% in one day! October 19, 1987 is infamously referred to as Black Monday. It is still to this day the largest single day drop in the history of the stock market.
The bear market of 87' began in August, just a few days after Alan Greenspan was sworn in as Chairman of the Fed. Under Greenspan’s leadership the Fed decided to make a public statement the day after Black Monday. The statement basically said that the Fed would provide liquidity to market. Today we are used to this. When markets first started to fall this year, everyone was expecting the Fed to make some major moves as it did in 2008. Even though the Fed is, and has always been, a lender of last resort, prior to 1987 it didn’t exactly come out and say it the way Greenspan did the morning after the crash. That was, in its own way, unprecedented. And it seemed to work; the market bottomed out after Black Monday and two years later would once again reach an all-time high.
Something else made the bear market of 1987 unique: it was the last bear market to occur in the middle of an economic expansion. Unemployment and GDP growth would continue to improve throughout the 1980s. In fact, between the years of 1983 and 1989 annual GDP growth averaged nearly 4%. Stock prices increased dramatically on this positive trend too. During the 2 years leading up to August 1987 the S&P 500 increased 80%, while the Dow Jones was up 100%!
Perhaps stock prices in 1987 had just gotten ahead of themselves and were due for a “correction”. That was not the sentiment going into the current bear market. 2018 saw two very healthy corrections: declines of 10% and close to 20% occurred at different times that year. Stock prices at the beginning of this year seemed reasonable. There was no bubble to burst or boom to bust. The bear market of 1987 serves as a reminder of just how quickly stock prices can decline, but it also reassures investors that the stock market, in the long run, can overcome almost anything.