No, I am not talking about Halloween.
It’s a phrase that I’d like to use to refer to this month. In terms of financial history, a “Black” day refers to a significant drop in the stock market. Basically, it’s a bad day; traders and investors see massive losses… panic ensues… seem familiar?
Black October simply means that this has been a bad month (so far).
Ironically enough, the “Black” financial days are in a way, financial “holidays.” Since the stock market drops, it is usually followed by a rally (stock market goes back up). Here, a different kind of investor will swoop in to buy things at a deep discount (due to the panic selling). As people see the stocks rising, they follow the trend and begin to buy in hopes of recovering their losses from their panic selling. This will often mark the bottom of a market slump.
So in short, history teaches us a lesson. The problem is, people are associating these past two weeks with another significant “Black” day, the market crash in 1929; lovingly referred to as “The Great Depression” (queue the dramatic music)…
Of course I know this is on everyone’s mind - or at least on the minds of those that have been watching CNBC or any other Wall Street related news channel. They’ve done a wonderful job of inciting more panic among the masses than I would like to think was possible and sadly, it’s all in the name of ratings.
Anyway, if you have been paying attention to the stock market then you would have noticed that for the first time in five years, the Dow Jones Industrial Average (the Dow) went below 10,000… then below 9,000… and yes, even below 8,000. That’s a 20%+ drop in a matter of days. The other major stock indexes, including the international exchange markets, did not fare very well either. Yes, I know that you’re thinking, “Wow, somebody lost a lot of money…” but that somebody may also be you.
So let’s chill out a minute - maybe have a little reality check. What I have prepared is a little comparison to quell some fears that we’re heading for the next “Great Depression.” Why? Because although things seem bad, they’re really not…
| Black October 2008
Oct 1st through 10th |
Black Monday
October 19, 1987 |
Market Crash 1929
Oct 24, 28 & 29 |
|
| % (#) Losses in Stock Market: | Approx. 22.11% decline over ten days (Dow, -2,399.47 points), largest one-day loss on Oct 9th at 7.3%, and counting… | A 22.6% decline (Dow, -508 points), the largest one-day percentage decline in stock market history | Approx. 40% decline over five days (Dow, -135 points), Oct 24 closed at 299.5 |
| Cause of the Bubble: | Low interest rates led to a massive real estate boom. Inflated values and frivolous lending allowed a record number of people to become homeowners. Mortgage back securities (MBS) and collateralized debt obligations (CDO) became popular among investors. Speculation in the market was based on the notion that values would always increase. The value of the dollar declined as the national debt and trade deficit kept rising. | Both 1986 and 1987 were fueled by hostile takeovers and mergers. People thought that companies would grow exponentially simply by constantly buying other companies. Junk bonds became a popular way to raise money. All this while the dollar was weakening, interest rates were increasing, and the trade deficit and government debt kept rising. | The Roaring Twenties was a time of financial prosperity and excess - the market increased more than fivefold. Speculation in the stock market was fueled by the belief that the market could sustain the high prices. Days leading up to the crash were highly volatile, trading record numbers of stock. Mass sell-offs were followed by short-lived periods of recovery. Oct 24th marked the start of a mass panic. |
| Cause of the Crash: | A combination of several factors, including decreasing home values, sub prime mortgage failures, and a freeze in the credit markets. A liquidity crisis developed among banks and investment banks alike when risky securities were no longer being traded, making them hard to value. Over time, the Fed and US Treasury stepped in with the FDIC to try to prop up Wall Street. Investors panic and pull out of the market. The story continues… | Still up for debate, but some explanations include speculative investment in portfolio insurance derivatives, in conjunction with computer trading (which was a new technology), all created a bubble and exacerbated the crash. Interesting point: No single news event occurred that could have triggered the crash. | Market panic contributed to the continued declines on the 28th and 29th. Record numbers of shares traded (sold). Rumors that Pres. Hoover would not veto the pending Hawley-Smoot Tariff caused panic. Influential investors (like the Rockefellers) tried to buy large amounts of stock to quell fears, but it did not help. The collapse continued for a month. |
| Market Recovery Period: | (TBD) | Did not regain its 1987 high until almost two years later. | Did not return to pre-1929 levels until late 1954. |
| Est. Value of Losses: | To date: Over $1.4 trillion in lost value (as of Oct 10, 2008) | Lost an estimated $500 billion in value (in 1987 money terms). | Lost an estimated $30 billion in value (in 1929 money terms). |
So as you can see, the current market downturn is significant, but not as bad as the media portrays it. We’re not experiencing massive losses comparable to those of Black Monday or the market crash in 1929 - at least not yet. Also, back then we did not have a lot of the safe-guards that we have today against market crashes - so we’re a lot better off.
Here’s a thought:
Perhaps we should be focusing on the fact that this is not just America’s problem anymore. It’s a global problem (as it has been for a month or so), which makes it a tad harder to control.
While the Federal Reserve (in all their glory) has not been willing to acknowledge that we (the U.S) are in a recession - as we have been for a few months… now they have to. There is no denying the fact that other countries are experiencing a slowdown because they all had a piece of the American debt that is going sour. But we have to remember that it’s part of the market cycle, no matter how big it is: it goes up, it goes down… and it goes up again, eventually. Fortunately for us, we will have the pleasure of experiencing the first global recession.
Don’t freak out. I know that it seems scary. But it’s about time that people realize the significance of how everything is interconnected. The past few years of our frivolous lifestyles, selfishly irrational behavior and our political failures (as an economy) are dragging down the rest of the world. Obviously, we have other unsustainable behaviors that must be addressed, but the point is: We need to change.
Twenty years ago (before most of us were born, ironically enough), this was not possible. If the U.S. went down, the rest of the world would feel the pinch and be upset (maybe not), but life would go on. Now, we’re all going down with the ship and everyone is looking for the life preserver…
Twenty years from now, how will we look back on today? Times are changing, but what we do in the months ahead and how we react now can and will make or break the situation. And I am not just talking about our generation anymore - it’s much bigger than that.
So are you going to panic?
~K
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