I doubt this comes as news to anyone; we have a crisis of
sorts with real estate, mortgages, and the credit markets here
in the US, which has spread to other parts of the world. Major
financial institutions have announced write-offs in the
billions, and consequently heads at some of these organizations
have rolled. We don’t know what the final outcome will be for
the housing market, credit markets, consumers or investors. Even
though we don’t know if history will repeat itself, we thought
it would be meaningful to look at events of a historical nature
and see what their impact was on the stock market, both short
term and long term. After looking at the bombing of Pearl
Harbor, the assassination of President Kennedy, Black Monday,
and the Asian Financial Crisis, history shows us that there is
no uniform reaction between bad news and a prolonged stock
market plunge.
Prior to the bombing of Pearl Harbor, the market had already
been in a downward trend. After the attack, the Dow Jones
Industrial Average (Dow) declined by about 5%. The last trading
day before the bombing the Dow was at 115.9, and ten years later
it had appreciated to 282.06, an average annual increase,
excluding dividends, of 9.3%. We use ten years, because we feel
that if you don’t have a long investment horizon, you shouldn’t
have your assets directly tied to the stock market.
On the day President Kennedy was assassinated the Dow dropped
by about 3%, but recovered within a couple of days. The effect
of this historical event was largely confined to the day of the
assassination itself.
On Monday October 19, 1987 the Dow had its largest one day
drop in history, dropping from 839 to 670, a drop of 22.6%. This
severe drop was not precipitated by a single historic event. It
is assumed that mass panic and a combination of program selling
created this record drop in the market, which is now known as
Black Monday. While it wouldn’t be until January of 1998, 15
months after Black Monday that the Dow returned to its previous
level, ten years later the Dow was at 2547.
After Black Monday, the major stock market and commodity
exchanges instituted what have become know as circuit breakers
and other trading limits to protect the market during periods of
severe market volatility. Circuit breakers are trading halts
imposed when the market drops by a certain percentage, starting
at 10%, in one day. These are intended to give investors and
traders time to reevaluate the market conditions and to prevent
panic selling, like that which occurred on Black Monday.
When it appeared that the Asian Financial Crisis could spread
to our domestic economy, the Dow reacted by dropping 554 points
on October 27,1997, a drop of 7.2%. The next day, the market
rebounded by 334 points, a record at that point for a one day
increase. While at the time it was felt the Asian Financial
Crisis could have a negative effect on our economy, our economy
continued to grow, and 10 years later the Dow had just broken
new ground with its first close above 14000.
In previous articles, we have taught our readers to keep fear
and greed out of their investment decisions and not be overly
swayed by short term movements. It is best to develop a long
term plan, and then stick to it through short term changes in
the market. If you have the right long term plan in place, short
term market volatility should not have any impact on you or your
long term plan.
Investing in the stock market is not for everyone. If you do
not have a long term perspective or a long time frame or
horizon, the potential risks outweigh the potential returns. If
you are overly concerned about the impact the current financial
crisis may have on your assets, you should have you accounts
reviewed, and the sooner the better.
Sources: Dow Jones & Co., Congressional Research Service
Library of Congress
Lineweaver Financial Group, 9050 Sweet Valley Drive, Valley
View, Ohio 44125. 1-888-313-4009 Securities offered through
Sigma Financial Corporation. Member FINRA and SIPC.
