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A Black Monday replay? Why market pros think it can't happen

  • On Black Monday, the Dow tumbled more than 22 percent, and for a while those who made the markets hum wondered if things would ever be the same again.
  • One of the principal causes of the crash as "portfolio insurance," which sought to protect investors by selling during market tumult.
  • Since that dark day, the Dow industrials have gained 1,025 percent.

Art Hogan was four years into his career on Wall Street when one of the market's darkest days hit, a massive crash that would make history and leave traders like him stunned and fearing for the future.

The Dow that day tumbled more than 22 percent, and for a while those who made the markets hum wondered if things would ever be the same again.

Looking back 30 years later from Black Monday, Hogan still remembers the angst of those dark days — but doesn't live in fear that a similar calamity will hit the Street again.

"We didn't know if there was going to be a place to go on Tuesday or Wednesday or Thursday," said Hogan, now chief market strategist at Wunderlich Securities but then working the trading desk at Fidelity Capital Markets. "When the markets started going on lower on Tuesday, that felt worse than Monday. If we started going down again, we didn't know who would survive this."

The market, of course, did survive.

In fact, even amid bear markets and the financial crisis and the advent of electronic trading that has transformed the New York Stock Exchange trading floor into a near relic, it has thrived. Since that dark day, the Dow industrials have gained 1,025 percent.

"Things started to normalize as more liquidity came in and markets got deeper. Things tended to stabilize when that shock had worn off," Hogan recalled. "About a month's time later, people cautiously got back in the market and things were turning. I don't think anybody was the same for a long time after that. A lot of that shell shock never really wears off."

Traders look at stock prices on screen on Black Monday at the New York Stock Exchange when the Dow plunged 508 points, October 19, 1987.
Anthony Pescatore | NY Daily News Archive | Getty Images
Traders look at stock prices on screen on Black Monday at the New York Stock Exchange when the Dow plunged 508 points, October 19, 1987.

Still, Hogan feels that despite the various calamities that have visited financial markets over the years, conditions are far safer now than they were then.

"Markets get overheated and we're going to have sell-offs," he said. "At some point we'll have corrections, we'll have bear markets again. I just don't think we'll see that form of dramatic onslaught in any given day."

However, behavior in the market today has stoked comparisons to what happened back then.

Rising valuations, a seemingly never-ending bull market run, a tightening Fed, rising bond yields — both eras certainly have similar components.

But it's the degree, according to multiple analyses, that separates the two. In short, there's little fear on Wall Street now that a Black Monday-type event is coming to a market near you.

"We believe that the stock market stands on a much stronger fundamental and technical foundation today than it did in October 1987, with less euphoric sentiment, making another crash like 1987 appear unlikely," LPL Financial said in a note. "Improvements in regulations and market structure can be debated, but investors clearly have better access to information and can trade much more easily."

One of the principal causes of the crash was "portfolio insurance," which sought to protect investors by selling during market tumult. However, the computers kept selling and never stopped on Black Monday until some leading market participants — Goldman Sachs' Robert Mnuchin, father of current Treasury Secretary Steven Mnuchin, being one of the most prominent — stepped in as buyers to help stop the bleeding.

There are other key differences.

While the current market continues climbing higher, the 1987 version was stratospheric, doubling in about two years. Inflation and bond yields were considerably higher back then and oil prices were surging. Some similarities: Then, as now, there were significant geopolitical concerns, the dollar was in decline and being talked down by important government figures — in the present case by no one less than President Donald Trump himself — and the Fed was tightening.

However, the issues were far more pronounced back then.

For instance, Doug Roberts at Channel Capital Research said the Federal Reserve of the late 1980s had been aggressively tightening while the current Fed has been gingerly returning policy back to normal levels from the historic aggressiveness during and after the financial crisis.

There's also little worry, he said, about investors walking away when the market declines.

"There are some similarities with the underlying conditions, the underlying vulnerabilities. The market is certainly richly valued," Roberts said.

"If you look at the Fed, there's been hawkish talk, but that's just about all there is. Right now, the tightening process still resembles moss growing over trees," he added. "Right now, every dip seems to be met by a purchase as opposed to a sell."

Still, that doesn't mean there can't be trouble ahead for a market that has jumped more than 14 percent this year and is up more than 280 percent from its crisis lows in March 2009.

"On this 30th anniversary of Black Monday, let's appreciate the gains that we have enjoyed during this bull market but not get complacent," LPL's analysis said. "Stocks don't go up in a straight line. Market events don't repeat themselves, but they sometimes rhyme."

WATCH: Trump told The Wall Street Journal in 1987 he sold 'all' his stocks before the 'Black Monday' crash