Not so happy anniversary: 20 years since Black Monday

It’s an anniversary many wish they could forget, but 20 years ago today the financial industry was faced with its biggest one day market drop since October 1929.

Black Monday, as it’s called now, saw the American markets fall 23% and the TSX drop 11% in a single day. Millions of dollars were lost, and some people feared that North America could be facing another depression.

“My father used to work for the TSX in 1929 and I remember him telling me stories of what happened then,” says Fred Ketchen, a 50-year financial industry veteran and Scotiabank director. “People jumped from windows, financial ruin descended on a whole bunch of people — I thought ‘holy smokes, is this what’s going on now?'”

Things didn’t end up as badly in 1987 as it did during the 1930s, but people were still concerned. “It wasn’t a joyful time,” says Ketchen. “At the end of the week we were down about 23%. But the climb back was much faster than it was in 1929. Things did calm down.”

Thane Stenner, head of Stenner Investment Partners of GMP Private Client, was still in business school in 1987, but he knew enough about investing back then to realize a huge market drop was a serious problem. It didn’t help that his professor reacted as if the world was ending. “He came into class and had a very glum look on his face,” says Stenner from his office in Vancouver. “He postponed class and said you may want to give a call to your family to make sure everything’s going OK. I didn’t know what he was talking about.”

He quickly called his dad, who was heavily involved in the finance industry. The elder Stenner not only gave his son a rundown on what happened, but he shared with him a very important piece of advice. “He reminded me that he’d been advising clients to buy stocks as quickly as he could.”

Scooping up stocks shed by irrational investors was one of the great lessons learned from Black Monday. When the market became volatile this summer, Stenner lived by his father’s wise words. “For every stock trade on the exchange, there is a buyer and a seller,” he says. “So whoever’s panic selling there’s some opportunistic buying matching off that.”

Besides the buying opportunities, Black Monday also taught Ketchen that the markets around the globe are connected. When he stepped into his office on October 19, 1987 and saw that indexes in every country were down, he knew something scary was about to happen in North America, he just couldn’t predict what that would be. And when he found out? “We learned that the markets no longer move in isolation. After that we paid a lot more attention to what was going on around the world than we had prior to the crash.”

But not everybody learned these lessons. Ketchen says people were more cautious for a short period of time, but once they “get out of the mess and things climb back up, [they] get back in [their] old habits.” For proof, consider the tech bust of 2000.

Now, 20 years later, the markets are considerably more healthy and robust than they once were, but investors still need to be cautious. In some respects, life today isn’t that different from October 1987.

Back then there were fears of inflation, a huge U.S. budget deficit and violence in the Middle East. Sound familiar? “You stop and look at these things today and tell me that we don’t still talk about this?” asks Ketchen.

One big difference between then and now was in 1987 interest rates were high. Today, Ketchen says it’s sub-prime woes and credit tightening that are worrisome, since interest rates are far lower.

Stenner also sees some similarities between Black Monday and today’s financial markets. He says there’s a fair amount of leverage and debt, which was one cause of the crash. But with lower price earnings multiples and a lower interest rate, Stenner’s not as quick to make comparisons between the two times.

Still, diligent advisors make sure their client’s portfolio is well diversified and they get them to think long term.

“It’s all about time in and not timing,” says Brad Jardine, president of Burlington-based CIC Financial Group. “You can’t predict [when a crash might happen] so you must be patient.”

In 1987 Jardine was a fresh-faced insurance agent, so he wasn’t affected by the crash, but he refers to that dark day often when he talks with clients. “I will do a what if scenario,” he says. “I say what if a client invested the day before Black Monday, and I’ll show them what would have happened if they hung in there for the last 20 years. They would have been fine if they were patient.”

Fortunately, it’s unlikely that the markets will see as frightening a drop as it did on Black Monday. Today there are safeguards in place to prevent such a huge fall. “Systems have been repaired and new regulations have been implemented that would have a better opportunity to cope with that kind of drop,” says Ketchen.

However, Stenner says, if there is another crash, it probably won’t see a sharp one. Instead we could see a more gradual stock market decline. “There’s a lot of safeguarding measures [to prevent a big one day drop], but by same token it could stretch out the correction a little longer.”

Ultimately, if your client wants to minimize the impact of a crash, they should follow this nugget of advice from Ketchen: “Don’t be greedy.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(10/19/07)

Bryan Borzykowski