Despite healthy corporate earnings and economic growth, investors are concerned that steep valuations may mean a correction is overdue, on the 30th anniversary of the 1987 stock market crash, when U.S. stocks are at a record high.
However, is a repeat of “Black Monday” possible today?
A repeat of the 1987 crash is made unlikely by the way investor funds are managed, changes to the way stock exchanges operate and modern trading technology.
Yet cautious traders refuse to rule it out.
“We have learned a lot from the mistakes of the past in terms of the reaction or over reaction,” said Ken Polcari, director of the NYSE floor division at O‘Neil Securities in New York.
Noting the biggest-ever single day decline in percentage terms by the blue-chip benchmark, the Dow Jones Industrial Average plunged 508 points, or 22.6 percent on Monday Oct. 19, 1987, following large declines on Asian and European markets the previous week.
Art Hogan, chief market strategist at Wunderlich Securities in New York said that a decline of up to 20 percent in one day is possible today, but it would likely be a more orderly process.
“We have the ability to shut things down for a period of time and reassess and try to ascertain what is the best way to get back in business and take a calmer look at things,” he said.
the creation of market-wide “circuit breakers” that call a temporary halt to trading after the Dow declines 10, 20 and 30 percent were mandated in response to the 1987 crash by the U.S. Securities and Exchange Commission. Since then, only one market-wide halt has been triggered in 1997.
With the Dow replaced by the S&P 500 stock index as the benchmark index, lowering the thresholds needed to trigger a trading pause, the circuit breakers were adjusted in 2012.
“The industry has come an awfully long way from ‘87,” said Larry Tabb, who heads capital markets advisory firm TABB Group.
“The regulators have done a good job at implementing rules that help the markets ensure that they stay stable at a time when there is not a reason for them not to be stable.”
In May 2010, the Dow Jones Industrial Average careened nearly 1,000 points, around 9.0 percent, in a matter of minutes before mostly rebounding in a similarly short period and many of the current measures aimed at taming market chaos were implemented after the May 2010 “flash crash”.
Pausing trading in the stocks in question when prices run afoul of the bands, the SEC approved a regulation in 2012 called “Limit-Up Limit-Down,” which prevents stocks from trading outside of a specific range based on recent prices.
“Anything is possible,” said Peter Costa, president of Empire Executions Inc in New York. “With the advent of computer technology and the speed at which that technology has transformed the market, it is very possible.”
With the advent of high-speed automated trading, and the Dow hitting a frothy 23,000 points for the first time ever on Wednesday this week, some traders are not sure even though the safeguards in place would likely prevent another 1987- style crash from taking place.
“Could it happen, something similar to that?” asked Gordon Charlop, a managing director at Rosenblatt Securities in New York. “Yeah. How will it pan out and what will be the outcome? That is why they play the game.”
(Adapted from Reuters)