ETF Watchlist: Week Of October 23, 2017

The financial markets marked the 30-year anniversary of single largest one-day decline in stock market history this past week. The October 19th, 1987 crash, known as Black Monday, lopped more than 500 off the Dow or a loss of more than 22% on the day (here’s a video of some of financial news programs reporting as the day unfolded). Not surprisingly, the anniversary has raised curiosity as to whether or not another event like this again, both from an economic and a programmatic standpoint. The short answer is it’s unlikely, but let’s take a deeper look.

Circuit breakers put in place following Black Monday (and modified multiple times since then) are designed to try to prevent panic selling. In its current form, trading will be halted for 15 minutes when the S&P 500 declines by 7% and can be halted for 15 minutes again if it falls by 13%. If the market falls 20%, trading is halted for the day. In theory, 20% should be roughly the maximum that the market can drop in a day, but also consider the effects that would occur in the ETF markets. A significant portion of an average day’s trading volume comes from ETFs. These funds trade on supply and demand and not always in lock-step with the indices they track. In a panic selling environment, an S&P 500 ETF could technically drop further than the S&P 500 itself.

From an economic standpoint, the current market doesn’t look a whole lot like 1987. That year was marked by sharply rising interest rates and rising oil prices. Adding fuel to the fire was the fact that the market had doubled in the two years leading up to Black Monday making the market as a whole more expensive than it is even today. Today, inflation is contained, the Fed is looking to raise rates very gradually and earnings have shown solid growth. While there are concerns today, 1987 had more concerns at the time. And the market has some safeguards in place to try to contain any panic selling.

The most interesting footnote to the Black Monday narrative? Despite the one-day 22% drop in the equity markets, the S&P 500 still gained 2% on the year as a whole.

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