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The many Black Mondays: How world markets react when the Dow plummets

  • The Black Monday stock market crash of 1987 caused a historic Dow Jones Industrial Average decline.
  • It also led to a ripple effect across global markets, with mass investor panic and selling.
  • There have been many Dow drops of significance since 1987, and research shows that some market trades offer more safety and bounce back quicker than others.
  • Overseas stocks tend to go down more and take longer to recover.
Traders work on the floor of the New York Stock Exchange.
Mario Tama | Getty Images
Traders work on the floor of the New York Stock Exchange.

Any investor old enough to remember the notorious Dow decline of 508 points on Black Monday — Oct. 19, 1987 — is probably old enough to recall The Golden Girls, name all four Beatles and know that a plummeting Dow Jones Industrial Average spares no world markets when it falls into a rapid, ruinous spiral.

That 508-point nosedive in the Dow then represented more than 20 percent of the U.S. stock market index, and the selling ricocheted around the world in a classic investor panic. The exact anniversary date passed last Thursday, but Monday would be a weekly point of comparison, and one thing is for sure: A daily Dow dive of some magnitude has to return at some point. The last time the Dow closed down more than 300 points was on May 17 of this year, amid Trump headlines related to the firing of former FBI director James Comey. The last time the Dow closed down more than 500 points was in June 2016 after the surprise Brexit vote.

There is no sign that the Dow is headed for a cliff anytime soon — in fact, it ended the week with a 160-point gain on the tailwind of better prospects for tax reform legislation, and big investors remain bullish on U.S. stocks. But investor psychology guarantees that days of panic will happen again.

A drop of that size in points would now represent much less of the Dow, but if the bears are right, investors can take comfort in the fact that big Dow drops are not uncommon. There's a long history to review to be better prepared — 80 drops of at least 300 points since 1987. And one thing is clear: There will be no safety in overseas stock markets. In fact, overseas stocks will stay down for longer and lose more than the Dow itself, according to data from Kensho, a hedge fund analytics tool that CNBC used to study times the Dow has dropped at least 300 points or 500 points in a single day over the past three decades.

Why global market reaction matters more now

In 1987 the performance of assets around the world mattered a lot less to most U.S.-based investors. Home bias is still the norm in stock investing, but even U.S. investors have gotten the international stock bug and started buying overseas markets, especially through ETFs. Long-term research supports this move, but investors who have decent exposure to developed markets outside the United States and the emerging markets should brace for a rocky ride the next time the Dow takes a nosedive.

More from Global Investing Hot Spots:

Jack Bogle doesn't hate international investing as much as you think

Chinese stocks have boomed again, but this time, a crash doesn't have to come next

Are foreign stocks too expensive to own now?

Here is how two of the flagship international equity benchmarks — the MSCI EAFE Index and MSCI Emerging Markets Index — react one trading day, seven trading days, and 20 trading days after a Dow drop of 300 points or more, which has happened 80 times since 1987. We've also included the Dow's return and select foreign currencies.

And here are the same assets in the one trading day, seven trading days and 20 trading days after a drop of 500 points or more in the Dow, which has happened 18 times.

The best trade of all

One of the best trades in the aftermath of these Dow dives — no surprise — has been the U.S. dollar. It generated an average return that was positive in each scenario, and one month after a Dow drop of 500 points or more posted an average return of 2.07 percent, trading positive 72 percent of the time, according to Kensho. Other safe-haven assets haven't fared nearly as well: Across the last 17 instances when the Dow dropped by 500 points or more, gold generated an average return of –1.85 and traded positive less than half the time in the trading month that followed.

(Disclosure: CNBC parent company NBC Universal is a minority investor in Kensho.)

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