A Look Back at October '87
The extreme swings continue in the stock market, with the past two days marking the worst two-day drop in percentage terms for the S&P 500 index since 1987.
In fact, the steep decline in stocks in recent weeks has been similar to the events of October '87. Although the current decline has played out over a few weeks instead of a single day, the extent of the losses has been similar, as has the volatility that continued after the panic selloff.
On Monday, October 19, 1987, the stock market plummetted more than 20% in a single trading session. Besides the dramatic events of what became known as "Black Monday", it is also interesting to note the extreme volatility that persisted in the market in the weeks after the event, with stocks experiencing numerous advances and declines of between 5% and 10% (sound familiar?)
Looking at the two-year period from 1987-89, the impact of Black Monday was still readily apparent despite healthy, double-digit gains posted by the stock market in 1988.
Over the five-year period ending in 1992, however, the effects of Black Monday were decidedly more muted. Despite the "crash" of the market in October '87, stocks still enjoyed a nearly 100% gain over the period.
Finally, looking at the long-term period from 1987-2006, we see that the worst single-day decline in the market's history was barely a tiny blip at the beginning of the period. By the end of 2006, the stock market had gained 700% since the beginning of 1987!
This particular chart ends in 2006 and doesn't reflect the steep decline in the market that began in October 2007. It is interesting to note, however, that even starting with the October '87 decline and ending with the October '08 decline, the market had still grown five-fold during that period of time!
It is not over-simplifying, therefore, to say that extreme market environments such as the one we are currently experiencing become mere speed bumps on the stock market's long upward climb over time -- as long as you are in a well-constructed, prudently diversified portfolio and don't allow short-term noise to scare you out of the market.