Yesterday was grim, but no Black Monday

Sometimes, even personal finance columnists get spooked.

Check this out: Early yesterday morning, I was burrowing into The Globe and Mail database looking at our coverage of Black Monday, which occurred on Oct. 19, 1987, and was one of the worst days ever for the stock markets. That's how torqued I was after reading a series of trembling commentaries on the latest in a string of disasters to befall the U.S. financial sector.

It's bad out there in the markets right now. Way bad. But it ain't nothing compared to Black Monday.

The Globe's front-page story on Black Monday called it a decline "of epic proportions," a "disaster" and a "massacre," all within just a few paragraphs. Such was the trauma after the Dow Jones industrial average fell 22.6 per cent - you read that correctly - and the Toronto market fell 11.3 per cent, all in a single day.

Comparisons between yesterday's plunge and Black Monday are to be expected, and that goes beyond the fact that both events happened on a Monday in the ever-dangerous months of September and October. Both declines began in Far Eastern and European markets and then spread like a contagion into North America. Also, both declines did not come in isolation. In each case, they were preceded by months of declining stock prices.

Black Monday was actually the culmination of a sharp, sudden reversal of fortune that followed two consecutive years in which the Dow made more than 20 per cent. By the time the Black Monday selloff was done, the Dow had fallen 36 per cent over a span of a few months. Today, the S&P/TSX composite index is off close to 20 per cent from its June peak, which is the usual standard for calling bear markets. The major U.S. stock indexes are down by similar amounts from their highs of the past 12 months.

We could certainly fall further, and we probably will. Alan Greenspan, former chairman of the U.S. Federal Reserve, said on Sunday we are witnessing a "once in a century" financial crisis that has not yet run its course.

But as worried as the experts, analysts and pundits are about what's happening today, it's important to keep some perspective. Things were worse around the time of Black Monday, and then the markets rallied.

The odd thing about Black Monday is that there's no definitive explanation of what went wrong for stocks. Interest rates were rising sharply back in 1987, and that led some investors to gravitate to the comparative safety of the bond market. Also, share prices were inflated after a long surge that was fed by an influx of money from mutual funds.

Today, there are a couple of clear and present dangers weighing on the markets, including an economic slowdown that has already hurt corporate profits and will probably continue to do so. The never-ending U.S. financial crisis is the big story, though. Banks, investment dealers and insurers in the United States can't seem to extricate themselves from bad investments that are tied in various ways to the struggling residential real estate market.

Black Monday was so cataclysmic that you don't commonly see the expression used to describe a stock market decline. But a few mentions began floating around on the Internet after news broke on Sunday that the legendary Wall Street firm Lehman Brothers, the fourth-largest U.S. investment bank, would file for bankruptcy protection.

Even old hands were worried about what would happen yesterday on the markets. "Wild day tomorrow," read the subject line of a e-mail blast from Sherry Cooper, chief economist at BMO Nesbitt Burns, that was sent on Sunday afternoon.

Yesterday was, in fact, pretty wild. The markets opened with a huge loss, cut that loss a bit and then fell back again. Comparisons to Black Monday are useful both to provide some context for this latest market setback, and also to provide something positive for investors to latch on to for the future.

Data from the mutual fund company Fidelity Investments shows it took 21 months for the Canadian market to recover ground lost in the 1987 market crash, while U.S. stocks took 23 months. Point of trivia: The Dow ended 1987 a touch higher than it began the year.

The more stocks fall in the weeks ahead, the more you're going to see comparisons to all the major market declines of the past.

Just remember that things aren't as bad as they were around the time of Black Monday, a disaster and massacre from which the markets had fully recovered in less than two years.