On Monday, June 4, 2007, the Dow Jones Industrial Average closed at 13,676.32 setting a new record high. Lately I have been wondering if investors should expect a decline on the horizon. Research led me to read the Wikipedia article about October 19, 1987 also known as Black Monday.
http://en.wikipedia.org/wiki/Black_Monday_(1987) I wasn't old enough to remember, but the market dropped considerably (~22.6%).
A certain degree of mystery is associated with the 1987 crash. Many have noted that no major news or events occurred prior to the Monday of the crash, the decline seeming to have come from nowhere. Important assumptions concerning human rationality, the efficient market hypothesis, and economic equilibrium were brought into question by the event. Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached.
The most recent buzzword has the 'sub-prime crunch' and residential housing slowdown. Interest rates have climbed from historical record lows to historical lows. In reading more about the economic situation surrounding the crash, I noticed that there were some similarities to today.
In 1986, the United States economy began shifting from a rapidly growing recovery to a slower growing expansion, which resulted in a "soft landing" as the economy slowed and inflation dropped. As 1987 wore on, it seemed that recessionary fears were not warranted and that boom times would continue. The stock market advanced significantly, peaking in August 1987 at 2722 points, or 44% over 1986 closing at 1895 points. There were a series of volatile days that caused widespread nervousness leading up to the crash, with the market ultimately sliding downward.
Anyway, I don't want to sound pessimistic, but I wouldn't be surprised if this sort of Black Monday downturn happens again soon. I think the market may be irrationally high. Private equity firms have done many leveraged buyouts of companies. I think this has led to inflated stock prices in general. Maybe the firms will hold on to their new private companies for a while, but who are they planning to sell them to down the road?
Labels: investing
