A quarter century after the worst one-day stock crash in history, measures to prevent a repeat are failing to keep investors from losing confidence in the market.
The 23 percent plunge in the Dow Jones industrial average on Oct. 19, 1987, came amid signs of a slowing economy, the threat of higher taxes and concern among individuals that trading was rigged for insiders. Today’s investors have pulled $440 billion from U.S. equity mutual funds since 2008 and sent trading to the lowest levels in at least four years, retrenching after the worst financial crisis since the Great Depression and the May 2010 stock crash, data compiled by Bloomberg and the Investment Company Institute show.
While Procter & Gamble Co. and McDonald’s Corp. are up more than 800 percent since 1987, protections adopted after the crash couldn’t stop unharnessed computer trading from erasing almost $900 billion of value in less than 20 minutes on May 6, 2010, based on data compiled by Bloomberg.
E.E. “Buzzy” Geduld, 69, who oversaw about 60 equity traders 25 years ago at Herzog, Heine & Geduld Inc. and now runs investment firm Cougar Trading LLC, says crashes happen when investors become convinced they’ve lost control.
“In 1987, everybody tried to go to the exit at the same time, but the exit door wasn’t big enough,” Geduld said. “You had literally a panic. Fast forward to 2012. The volumes we can handle are gigantic, but the exit door hasn’t changed in size.”
Leaving stocks
Individuals are abandoning stocks even after U.S. Federal Reserve Chairman Ben S. Bernanke held interest rates close to zero for a fourth year, valuations for the Dow remain 23 percent below the level at the market peak in October 2007, and exchanges installed safeguards following the so-called flash crash in 2010.
U.S. stocks are in the 44th month of a bull market that has restored $9 trillion in share value, data compiled by Bloomberg show. The Standard & Poor’s 500 Index has more than doubled since March 2009 and is up 15 percent in 2012.
Average daily volume for U.S. equities was 6 billion shares in the third quarter, the lowest level since at least 2008 and about half the 10.9 billion average in the first three months of 2009. The total has decreased for 12 of the last 13 quarters as investors pulled money from American stock mutual funds for a record fifth year, according to data compiled by Bloomberg and Washington-based ICI.
2008 memories
The retreat from equities has been fueled by memories of 2008, when the Dow slumped 34 percent during the worst economic contraction in seven decades. Europe’s struggle to contain debt turmoil, which pushed daily swings in the S&P 500 to twice the five-decade average last year, and mishaps such as Knight Capital Group Inc.’s trading malfunction on Aug. 1 also hurt investor confidence.
“Today when there’s volatility, it scares people to death,” said Timothy Ghriskey, 57, the chief investment officer at Solaris Group LLC, which manages about $2 billion in Bedford Hills, N.Y. “You can theoretically protect yourself on the downside, but when things come unhinged, nothing’s going to protect you.”
Stocks crashed in 1987 two months after the end of a five-year bull market in which the Dow average tripled. The 30-stock gauge was up 37 percent through the first nine months of the year before losing 9.5 percent in the week ended Oct. 16. The decline came amid concern that 10-year bond rates, then at about 10 percent, would increase and speculation that Congress planned to kill tax benefits for leveraged buyouts.
Black Monday
On Black Monday, Japan’s Nikkei 225 Stock Average fell 2.4 percent. By midday, stocks in London were down 10 percent. In New York, 11 of the 30 Dow components didn’t open in the first hour of trading. The Dow went on to fall 508 points, while the S&P 500 tumbled to 224 from 282.
In 1987 panic spread on Wall Street by phone and ticker tape. About $1 trillion in stock market value was erased in four days, according to a report by a task force led by Treasury Secretary Nicholas Brady in January 1988. It took more than a year to restore it, compared with a week following the retreat on May 6, 2010.
Mike Earlywine, 47, a hedge-fund trader at Ecofin Ltd. whose first job was as a clerk at Salomon Brothers Inc. in New York, witnessed the magnitude of the 1987 plunge on the streets of New York’s financial district.
‘All gone’
“We walked out to the exchange and literally people were spilling out,” Earlywine said. “You’re standing there in the street on the sidewalk and people were coming out of the exits and falling over, and guys were literally weeping into guys’ shoulders saying, ‘It’s gone, it’s all gone.’ ”
The onslaught of selling almost capsized U.S. markets on Oct. 20 and led regulators to eventually adopt coordinated halts across markets to prevent a recurrence, according to David Ruder, chairman of the Securities and Exchange Commission in 1987 and now a professor at Northwestern University’s School of Law in Chicago.
“The most frightening part ... was the thought that the NYSE might have to close because it did not have sufficient demand,” said Ruder, a member of the advisory committee formed to make recommendations to the Commodity Futures Trading Commission and SEC.