When the stock market lost more than 22 percent of its volume on Oct. 19, 1987, Rob Williams wasn?t buying into the panic. Instead, the next day, he bought stock.
“I remember that night, a friend called me. He was really scared, he thought he had lost his inheritance,” recalled Williams, now a portfolio manager with Baltimore-Washington Financial Advisors. “This is the point where I stopped to think, this doesn?t make sense. Stocks in the long run will be OK. The next day, we were in there bargain-hunting, looking at what to pick up.”
Though that market crash 20 years ago was equal in percentage to the 1929 crash associated with the start of the Great Depression, the economy recovered much more quickly. Experts cite various reasons for the fast turnaround and say investors didn?t buy into the panic ? though some had good reason to.
“Everybody was stunned, as they continued to see the market go down,” said Robert Wasilewski, also now a portfolio manager at Baltimore-Washington Financial Advisors. “I know good people, smart people in the business, that caused them to leave the business. The equivalent drop today would be if the market dropped about 3,000 points.”
But the Federal Reserve, under Chairman Alan Greenspan, moved quickly to reassure investors, learning from the stock market crash of 1929, when it allowed big losses without acting, according to Stephen Walters, professor of economics at Loyola College.
“[The 1987 crash] was a blip because of a very proactive response by the Federal Reserve,” Walters said. “The Fed injected a lot of liquidity, made it clear to financial institutions they would act as a lender of last resort.”
Others found different reasons for the limited damage, including tech-based companies arriving on the scene.
“Back in those days, we were driven by GE and GM and others,” said Peter Morici, professor at the University of Maryland?s Robert H. Smith School of Business. “They?ve been replaced by the virtual economy, people who market ideas ? they don?t really need the stock market in the same way heavy industry does to prosper.”
Williams and Wasilewski said it?s unlikely a similar crash would occur today, with safeguards installed in the last two decades, including a temporary pause in trading if the market loses too much volume duringthe course of a day.
Morici said the stock market also lost some importance with the emergence of tech companies, and became more a tool for record-keeping.
“The stock market remains very important to the U.S. economy and it imposes record-keeping conditions, but you come to the stock market once you?re established to cash in,” he said. “The stock market isn?t the game, it?s where we keep the score.”
