Stock market corrections are painful. They tear at our psyches and damage our emotions. They often cause widespread panic. Fear is one of the strongest human emotions. For all of our outward bravado, we scare pretty easily. When the stock market starts to go down it can cause us to panic. What if I lose all of my money? How will I feed my children? Panic can lead us to make bad emotional decisions. And let’s be honest, when we make bad decisions, those decisions usually come from our emotions, not from our logic.
As I am sure everyone is aware, we have recently experienced one of these painful declines. It might be helpful to look at past stock market declines and see what they can teach us about today and tomorrow. The granddaddy of all stock market declines was the crash of 1929. In September, the Dow Jones Industrial Average peaked at 381. Beginning in October, the market began a devastating four-year decline that brought the Dow all the way down to 41. That decline created the Great Depression. People starved.
In 1962, the market endured a sharp decline known as the Kennedy Slide or Flash Crash of 1962. From a high of almost 750 in 1961, the market tumbled to a low of under 550. At the time, in a rare moment of candor, the chairman of the American Stock Exchange credited the steep decline to the market correcting from an over-bought position.
The next major event occurs between 1970 and 1982. This was a period of high inflation and is certainly the one that scares many investors today. Inflation is insidious and, like black mold, it is hard to kill. Over the 12-year period, as four different presidents attempted to Whip Inflation Now, the Dow bounced up and down from a low of just over 600 to a high of just over 1,000 on four separate occasions. Each time the Dow hit 1,000 it immediately went back down. That is until the fourth time during the Regan administration. The fourth assault on Dow 1,000 proved to be the charm. The Dow rocketed to 2,750 in five years.
1987 was painful. The Dow dropped 22.6% in a single day in October. I remember sitting in my office at EF Hutton & Co. It felt like the world was coming to an end. In total, the market would give up 1,000 Dow points, dropping from 2,750 down to 1,750. It then recovered. By July of 1990, the Dow set a new high of 2999.75. It took three years, which is a lifetime for an individual and a drop in the bucket for our country. In total for the decade, the Dow jumped from a low of about 800 to a high of about 3,000, which is pretty good especially considering that 30% decline in 1987.
The worst stock market event of this century occurred when the Dot Com bubble burst in January of 2000. The market began a debilitating decline that lasted three long years. That three-year decline took the Dow from a high of 11,700 all the way down to a low of 7,500. The constant, never-ending decline of that three-year period was hard to stomach. The market would not set a new high until sometime in 2006.
Many people remember the Great Recession of 2008-2009 as the worst financial calamity this country ever endured. It wasn’t. However, the market decline was exceptionally steep. After reaching a high of just over 14,000, the Dow dropped to 6,600 on March 10th of 2009. A year later, the Dow had regained most of its losses and within two years almost all.
Recently, the market has experienced another large decline. After ending last year at around 37,000, the Dow declined to a low at 28,600 before bouncing back up to just over 32,500 on October 28, the 93rd anniversary of the 1929 crash.
All of these events followed periods of irrational exuberance, often driven by younger investors and built around the myth that the market always goes up. It doesn’t. The market goes up and the market goes down. It is like life. During periods of investment turmoil, scammers crawl out of the woodwork like cockroaches offering high-commissioned secret magic that promises to alleviate all of your emotional and financial angst. Don’t be fooled. There is no such thing as magic. Cults often promise the same thing, secret knowledge that will alleviate all of your emotional and financial angst. Joining a cult is almost never a good idea.
Examining the past, we can see that when the market has declined in the past, it has always recovered and gone higher. That is likely to be the case again, although there are no guarantees. If you are still nervous and scared, my best advice is to call me. I will give you honest advice and help you as much as you let me.
Scott A. Grant is a local author and historian. By day he is a fiduciary asset manager with Standfast Asset Management. He doesn’t believe in magic. scottg@standfastic.com
