The current sell-off has a similar feel to October 1987, where the crash was was precipitated not by a single external shock or tectonic shift but by an accumulation of bearish sentiment that led to a major sell-off. Here is a brief timeline (with thanks to Wikipedia):
- August 25, 1987, the Dow peaked at 2,722 points after a strong 44% run-up over the previous 12 months, with low inflation and falling crude oil prices boosting the recovery.
- October 14, the index dropped 95.46 points (3.8%) (a then record) to 2,412.70.
- October 15, Iran attacked the American-owned (and Liberian-flagged) supertanker, the Sungari, with a Silkworm missile off Kuwait’s Mina Al Ahmadi oil port. The Dow fell another 58 points (2.4%), down over 12% from its August high.
- October 16, Iran hit another ship the next morning, the U.S.-flagged MV Sea Isle City, with another Silkworm missile. The Dow fell 108.35 points (4.6%) to close at 2,246.74 on record volume. Markets in London were closed due to the Great Storm of 1987.
- Monday, October 19, 1987, the crash began in Hong Kong and spread West. By 9.30am the Footsie (FTSE 100) had fallen over 136 points. Later that morning, two U.S. warships shelled an Iranian oil platform in the Persian Gulf in response to Iran’s earlier attack. The sell-off reached the United States, with the Dow Jones Industrial Average falling a record 22.6% or 508 points to 1,738.74.
The total draw-down of 36.1% was at least partly attributable to fears that conflict with Iran would impact on oil prices but there were also underlying tensions relating to exchange rates after the 1985 Plaza accord as well as fears of rising inflation and higher interest rates. What should not be underestimated, however, is the effect of programmed trading as institutional investors dumped stock in response to falling prices.
We are currently witnessing a similar herd mentality, where investors sell because others are selling, without heed to the merits of the stock they hold. Just not as severe (so far).
The Dow correction is secondary but a lot will depend on this week. Whether primary support holds at 23,500 and whether institutional sellers join the melee.
The Moral of the Story
Compare Dow values today to those in 1987. The recent peak of 27,000 is almost ten times higher than the peak of August 1987. There is a lot to be said for sitting tight.