An unexpected stock market crash occurred on Monday, October 19, 1987. When the markets closed, the Dow Jones Industrial Average had collapsed by 508 points representing a one-day decline of (22.6%.)
One indicator on Black Monday did move higher; the individual anxiety index every investor closely monitors. The speed and violence of the decline were stunning. The system came within hours of a total collapse as the power of technology overwhelmed a system that had worked since 1792. This financial hurricane left the investing landscape in tumult and rubble.
But stocks falling 20% was not what scared authorities. The true horror of the event was the issue of liquidity and the loss of money that would crash the overall economy, not just the financial markets. Some say we came close, too close, which is why the 16th largest bank in the US failed over the weekend, creating this current mini-crisis for the potential of losing liquidity in the financial system.
The news of doom and gloom will be heightened in times like these. Thanks to social media, information is spread quickly. Panic is easily created by influencers and those entities that traffic in taking advantage of the panic they may have helped create. Don’t be fooled by the flippant social media post that could never capture the complexity of a situation as we witnessed over the weekend in Silicon Valley.
If your anxiety index is elevated, it would be justified. A systemic risk, like a sudden bank collapse, will shake the very foundation of any financial plan. What was thought to be safe could be quickly eroded. We highly recommend reviewing your personal financial plan in the weeks and months ahead.
In the last few days, the echoes of 2008 & 2009, as well as 2020, have been reverberating since the regulatory authorities took action to stop a potential spread of a lack of liquidity in the national banking system. The moral hazard of backstopping uninsured depositors will remain unanswered, but history will know.
I’m often asked if a financial crisis is possible. This question has been asked to me since 1987, and every financial crisis has the same issue, a loss of liquidity. I highlight 1987 to point out that since Black Monday, authorities have been living with the near-death experience of a total loss of liquidity.
There is a vital role for cash to play in your financial plan. We have been reviewing cash positions for clients and recommending cash alternatives where appropriate. Many options are now earning attractive rates of return, in our opinion. We believe it is worth your consideration to review those options.
Finally, the overall financial system’s main pillars appear stable. Capital is substantial for most of the sector, and quality loan portfolios comprise most of the nation’s banks. Today’s market volatility will most likely be a short-term blip in the long-term chart of the stock market. Just like 1987 or 2008-09.
We still believe the Federal Reserve and interest rate policy remains the story. The bear market will stick around until Fed policy ends its tightening cycle. Stay sober-minded, but be prepared to take advantage of market opportunities. This bear market will end if history repeats itself and higher prices lie ahead. Patience should be rewarded.
The information has been obtained from sources considered to be reliable, but accuracy is not guaranteed. The views and opinions expressed are those of Kevin Clark, Managing Partner of West Michigan Advisors, are as of this date, and are subject to change without notice. Further information is available upon request. Past performance does not guarantee future results. There can be no assurance the trends mentioned will continue. Investing involves risk and you may incur a profit or loss. No investment strategy is guaranteed to be successful.