Tale of The Tape: The Crashes of 1987 And 1929
Senior Features Editor
The stock market crash of 1929 was both a good thing and a bad thing for the investors in 1987.
At the least, it provided some perspective in that the market crashed before and the world survived; at the worst, it was a bad precedent in that the crash preceded the Great Depression and a world war.
“No one at the time thought there wouldn’t be a lasting impact,” says Robert Hormats, a managing director and vice chairman of Goldman Sachs International. “The prism people were looking through was the crash of ‘29. It was a serious collapse of the wealth effect.”
Today, market historians, observers and participants pretty much all say the two crashes have little in common and in that way they make for some good comparisons.
Crash Vs. "Crashette"
The crash of Oct. 19, 1987 hacked about $1 trillion off the value of the U.S. stock market, versus an estimated $14 billion on Black Tuesday, Oct. 29, 1929.
The crash of 1929 represented an enormous loss of wealth – both for individuals and companies. The crash of 1987 was sort like the market losing its wallet for a couple of months
One possible reason was that the Federal Reserve intervened in 1987, having inexplicably failed to do so in 1929.
Broadly speaking, the recovery from the 1987 crash was sure and swift and continued the greatest bull market in history, one that finally ran its course sometime in 2001. The economy didn’t fall into recession until the third quarter of 1990, after oil prices had spiked because of Saddam Hussein’s invasion of Kuwait.
“I call it a ‘crashette’ because it didn’t produce a long-standing bear market,” quips Robert Stovall, who started on Wall Street in 1953 and is now managing director at Wood Asset Management.
Recovery from the 1929 crash, however, was long and -- given the onset of the Great Depression, which many historians consider an unrelated event – painful. On an economic level, business bankruptcies and unemployment soared as a result of Wall Street’s collapse.
In 1987, after a turbulent eight days, the market appeared to have stabilized. By the end of the month, the Dow was some 15 percent above the Black Monday close. The blue-chip index spent the rest of the year trading between 1,776 (some 40 points above its Black Monday close) and 2,014 (some 200 points below its close the day before the crash) and ended 1987 with a small gain. The Dow did not surpass that Oct. 16 level until January 1989.
By the second anniversary of the crash, the Dow was at 2,683, still some 60 points below the then record high of 2,746.65 set on August 25.
“The biggest impact of ‘87 was the fact that we recovered relatively unscathed,” says William Silber, a professor at NYU’s Stern School of Business, who has also worked for Wall Street firms and the Council of Economic Advisors. “It was a new world. We went on to bigger and better things.”
One Bad Day After Another
In 1929, much like 1987, the market fell dramatically for a period of time before the actual crash. But the 1929 crash itself and the recovery were very different market animals, indeed.
The 1929 crash was actually a series of bad days -- Black Thursday, Black Tuesday, which caused the real panic, and the Monday in between, when the Dow fell 13.5 percent, or 40.6 points, a record at that time. (The Dow lost almost 23 percent, or 508 points, on Oct. 19, 1987.)
Stocks first plunged on Oct. 24 and kept falling for the next month. Though the market later staged an enormous, multi-month recovery history shows that it was a sucker’s rally because a brutal bear market was probably already underway. By the bottom in July 1932, the Dow was some 89.2 percent below its pre-crash peak of 381 on Sept. 3,1929. It took another 22 years for the Dow to climb above the 300-level.
The 1929 crash, like the one of 1987, engendered a federal commission to investigate the causes. More importantly, it had a profound legacy, helping to lead to the creation of the Glass-Steagall Act of 1933, which separated the activities of commercial banks and investment banks, essentially barring commercial banks from dealing in securities (The law was repealed in 1999).
The 1987 crash yielded a 900-page report and legislation for oversight and coordination of program trading, helped lead to the institution of trading halts and curbs, and, some would say, a real estate recession that started in the Northeast. President Reagan turned out to be right, the economy really was "fine."
“Whatever it was, little has changed, since prices came back,” says Eugene Fama of the University of Chicago Graduate School of Business, who is known as the father of the efficient market theory, which says prices fully reflect available information. “It’s the crash that looks like a mistake on 20/20 hindsight.”