DOW Largest Drop? Historical Context Paints a Different Story
UPDATES Follow at End of Story
The headlines across America today are “DOW dives 778 points, biggest drop ever!” yet Marketwatch has a different take: in historical context, yesterday’s drop was only one-third of the 22.6 decline during 1987′s Black Monday and that the DOW, on average, was due for an “adjustment” of this magnitude every 7 years:
ANNANDALE, Va. (MarketWatch) — A little historical context, please.
Monday’s market plunge may have been the worst point drop ever for the Dow Jones Industrial Average ($INDU:Dow Jones Industrial Average Last: 10,365.45-777.68-6.98%
$INDU 10,365.45, -777.68, -7.0%) , but in percentage terms it came nowhere close. It dropped 7% on Monday, or just one-third as much as the 22.6% decline in the 1987 crash.In fact, there have been 16 other occasions since the Dow was created in 1896 in which the Dow’s percentage drop was greater than it was Monday. That works out to an average of every seven years.
It furthermore has been almost exactly seven years — Sept. 17, 2001 — since the last time the Dow dropped by a greater amount than it did on Monday.
The Marketwatch analysis of yesterday’s drop is interesting as it also looks at the S&P numbers and its decline, how the S&P was long overdue for an “adjustment”.
As of this morning the markets have already posted a 200 point gain:
Dow Jones industrial average futures rose 200, or 1.91 percent, to 10,674 after falling more than 777 points, or 6.98 percent, Monday. It was the blue chips’ largest point drop and 17th largest percentage drop.
Standard & Poor’s 500 index futures rose 31.60, or 2.82 percent, to 1,150.10, and Nasdaq 100 index futures rose 32.25, or 2.13 percent, to 1,544.25.
UPDATE: Tuesday, September 30, 2008
The worst day in Stock Market history was “Black” Tuesday, October 29, 1929, but not in regards to “percentage points”. Those designations go to two separate “Black Mondays”, 1987 and 1929. The October crash in 1929 also marked the beginning of the Great Depression and the end of the Roaring Twenties.
By November, the Great Stock Market Crash had the market falling to 40% of its value. By July of 1932, the DOW had fallen to a 89.2% loss.
But in 1929, the bubble burst and stocks started down an even more precipitous cliff. In 1932 and 1933, they hit bottom, down about 80% from their highs in the late 1920s. This had sharp effects on the economy. Demand for goods declined because people felt poor because of their losses in the stock market. New investment could not be financed through the sale of stock, because no one would buy the new stock.
But perhaps the most important effect was chaos in the banking system as banks tried to collect on loans made to stockmarket investors whose holdings were now worth little or nothing at all. Worse, many banks had themselves invested depositors’ money in the stockmarket. When word spread that banks’ assets contained huge uncollectable loans and almost worthless stock certificates, depositors rushed to withdraw their savings. Unable to raise fresh funds from the Federal Reserve System, banks began failing by the hundreds in 1932 and 1933.
–PBS
According to PBS, most banks in the United States had “ceased to function”. Businesses couldn’t get credit, checks drawn on banks were worthless. President Roosevelt had all banks close for three days, a “Bank Holiday”. Once banks reopened, there were strict limits on withdrawals. It was also the advent of the FDIC, or Federal Deposit Insurance Corporation.
The market bottomed out at 41.22 of 381.17 and wouldn’t recover for another 22 years.
Source – About.com
By LBG
Image – 1987 Black Monday
