By: Spencer Israel
Monday marks the 33rd anniversary of Black Monday. On a percentage basis, the crash of 1987 remains the worst day in the history of the U.S. stock market by a long shot.
Just two months prior, the Dow Jones Industrial Average had hit an all-time high. But the index fell 22.6% on that day, with the S&P 500 not far behind at -20.4%. Many of the largest and most liquid stocks like Disney, Exxon, and IBM didn’t open for several hours, and rumors swirled that the New York Stock Exchange would have to shut down to calm markets.
In all, over three years of gains were wiped out in one day. The carnage was so bad it led to the death of one financial tool (portfolio insurance) and the birth of another (ETFs).
This story is well known, as is what happened next. Stocks were volatile in the short-term, but Black Monday ended up being the buying opportunity of a lifetime. Less than two years later, in July 1989, the market was back at all-time highs. From the Black Monday low to today, the S&P 500 has risen roughly 1,500% and the Dow has risen 1,600%.
In a year that has been unlike any other, it’s worth remembering this lesson. For investors with a long enough time horizon, history is on your side when it comes to buying the dip.
This isn’t to say that buying the dip always works. Nothing always works, and there’s no rule that says stocks have to come back to their previous highs (see the big bank stocks after the Financial Crisis). And it remains a very real possibility that COVID-19 results in generational changes to the way we travel, work, and spend, which could in turn have ramifications for the companies in the crosshairs of these changing behaviors.
But think back to March, when we stomached the second-worst, fifth-worst, and 13-worst days in Dow Jones history within a one week span. Did you ever think we’d be at new all-time highs just five months later?
Whether or not this rally is rational depends on your view of the unprecedented monetary support provided by the Federal Reserve. There’s certainly an argument to be made that the rally back to all-time highs has put us in a prime position for another massive sell-off should a vaccine take longer than expected or the virus’ spread gets worse. Or we could just keep on marching our merry way to new all-time highs.
But even if we do get another crash reminiscent of March or Black Monday, history tells us that most investors would do well to either buy more or sit on their hands.
Active Trading with Lightspeed
Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.
Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.
Copyright © 2001-2020, Lightspeed, LLC. All Rights Reserved.