It’s the season of ghosts, ghouls, and things that go bump in the night. In this Halloween edition of The Investor Coaching Show, Paul shares a Halloween tradition and spends the hour with Jim Wood reading through the ThinkAdvisor article “13 Scariest Days in the U.S. Stock Market.”
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Paul Winkler: Welcome to the Investor Coaching Show. I’m Paul Winkler, here with Jim Wood, talking about the world of money and investing.
Here are the top 12 scariest things you can hear from your broker this Halloween, from the perspective of my son, Andrew.
Okay, Number 12…
Andrew Winkler: We’re sorry, but the number you’ve dialed is no longer in service or has been disconnected.
PW: Number 11…
AW: We got a government bailout because of our bad investments, but we know exactly how to manage your money.
PW: Number 10…
AW: You can get stock market returns with no risk in this investment.
PW: Number 9…
AW: No, we didn’t accidentally leave any zeros off your account statement.
PW: Number 8…
AW: You stayed in the markets? I got out months ago.
PW: And here’s number 7…
AW: Congratulations. We’re naming tech law after you.
PW: And here’s number 6…
AW: Please sign here. My car payment’s due. I mean, this is good for you.
PW: Number 5…
AW: I thought that when you said you wanted to invest in gold, that you wanted me to wear it.
PW: Number 4…
AW: I don’t understand this, but my manager says it’s a great investment.
PW: Number 3…
AW: Our firm’s been around for 80 years and only been bailed out by the government once.
PW: And here’s number 2…
AW: You didn’t really want to retire this year, did you?
PW: And finally, the number 1 scariest thing that you can hear at your broker’s office this Halloween…
AW: I’ve got good news and bad news. The good news is that I didn’t put all of your money with Bernie Madoff.
PW: So in the tradition of the Halloween season, I saw something today that I thought would make a good little segment for us.
It’s the 13th scariest days in the U.S. stock market. We’re just going to walk through them because as an investor, you can see these days and you go, “It’s all over. Oh my goodness.”
And of course we’ve talked about market downturns a bit lately just because it’s been the thing of the year.
Jim Wood: Well as there always is, when there’s times good and bad, it’s always based on some forecast of the future that may or may not come true.
PW: Yeah, well, I think that the advising community has been given way too much credit for being more disciplined than they are. That’s all I’ll say. So anyway, moving on to the 13 scariest days in the stock market. Up first is October 26th, 1987.
JW: Yeah, I figured that would be in there. That was the first one I thought of.
PW: Number 13 on the list. Yeah. It was October 26th, 1987. Now, this was a week after the big Black Monday drop, though.
The New York Times reported the day as, “Investors had hope for a rebound, but stocks fell in another abbreviated trading session.” Now, that was an interesting year because technically if you look at the entire year of 1987, the stock market was actually up.
Nobody remembers that part. All they remember is that huge drop in the market. People have a tendency to do high watermark investing, so to speak. So they remember the highest point that their portfolio was at. Have you noticed that with people?
JW: Oh, I have that conversation all the time, that the way our minds work, we see a number, and it’s the biggest number we’ve seen so far, so we lock it into our brain that that’s what our account’s worth. The tide comes in, the tide goes out, but the tide is rising over time, or at least it certainly has historically.
PW: It is. That is just a psychological thing that people do. They tend to remember the very highest number. Sometimes I’ll show people returns and gain over the history of the portfolio, and especially after a downturn, you get this, “Really? It did that well?” They get this look on their face, like, “Seriously?”
They forget where they came from. They only remember that in recent history it went down. And so that’s a very big tendency.
I think the lesson for people is that that will draw you out of discipline in a heartbeat if you look at things that way, constantly watching things and memorizing the high watermark on your portfolio.
JW: Especially tough this year because the portfolios peaked around the first of the year. And so if people look at it either quarterly, or yearly, or whatever, and you say, “Okay, this is my year end value.” And then we’ve had three negative quarters, then people are really, really locked in that January 1st value.
PW: Or toward the end of last year. You had some rough months toward the end of last year, too. So it’s been a difficult period of time.No one really knows when it’s going to end.
With the Great Depression, there was an 87% drop in the market in one day. Dow Jones fell 15% for the week. People asked when it would end. Yet, the rest of 1933 actually was a good year. They had like an 80% decline in the stock market from 1929 to 1933, yet from then on it was undone.
JW: There’s some really good charts out there that will show the year by year maximum drawdown each year. But then it also shows what the market did that particular year. And it’s just amazing.
You can have these 20%, 30% drops and some years still end up positive. So even though you’re going through some period of negative returns, you never know when that’s going to turn up.
Sometimes you can have a couple of negative quarters in a year and you still end up positive. That happened two years ago during COVID, and by April 15th it looked like, “Oh, we’re in for a rough year.” And the year ended up positive.
PW: Yeah. And significantly so. And it’s interesting because you look at how the change happens. I like showing people charts when the day changes, because you’ll see that the line is straight up. It’s not just gradually increasing.
Typically what happens is that there is some news that comes out and all of a sudden the holders of stocks will no longer sell it at the old price. Maybe the old price is $50, let’s say. And then news comes out and now the new price is $70. That’s just it, if you want one particular stock.
Because I am not, as the investor, as the person that currently owns the company, I am not going to benefit from how this news is going to likely positively affect this company. So therefore, if you want this thing off of me, you are going to have to pay big bucks.
We saw that with the real estate markets, when we saw where somebody goes, “Hey, you know what? You want this house, There are 18 bidders against you. And hey, forgo the inspection. Matter of fact, forgo everything that you normally do when buying a house if you want this thing.”
It’s funny when people want it, they want it bad. And that’s exactly what happens with stocks. If they want it bad enough, a much higher price is going to be there.
JW: I had a client mention the other day that every time you make a trade, there’s somebody else on the other side of that trade.
If you’re selling, there’s somebody out there willing to buy it at whatever that price is. And if you’re buying, you have to find somebody to sell it to you. It’s exactly what you’re talking about.
You have to find somebody that will sell it to you at a price you’re willing to pay. And so you get parity in terms of what it’s worth. And if there’s more buyers, then that’s going to put upward pressure on the price. And that’s exactly what you’re talking about.
PW: Well, yeah. And it’s not like you’ll send it back to the company, and they’ll buy their stock back.
In the trades, you’re sending it back to somebody else that is completely unrelated to the company in the vast majority of cases.
September 29th, 2008 was another big one in more recent history. It was 8.79%, almost a 9% drop in one day. Stocks fell sharply when the House of Representatives rejected a $700 billion bank bailout.
I remember saying, “Hey, look, they’re going in and they’re looking at this big bank bailout, $700 billion.” I said, “And people say, ‘Oh, this is going to be terrible for this stock market.’ Well, what got us out of the depression? World War II.
What was that exactly? It was a big spending program. We bought tanks that got blown up, planes that got shot out of the sky, ships that got sunk. We spent a bunch of money on things that didn’t make it home. And the reality of it, it was a big spending program. And companies make these products, and they sell them, and they make profit on them.
If you have money that gets spent, then what happens is a lot of times this ends up back in the coffers of the corporation. And hence the reason that I wasn’t all that pessimistic about this whole bill, the bank bailout program.
I went on TV and I said, “Hey, this could be beneficial.” I didn’t know anything back then. You didn’t know what was going to happen or when it was going to happen. But indeed, it was one of those things where you had a bank bailout. Things were bought that were on the bank books, properties that nobody wanted.
And it was interesting, because the properties and the things, the assets were worth very, very little. And the government said, “Hey, we’re going to make you whole.”
The banks had all of these assets that were worth, well they didn’t know what they were worth. They just had them in their books. It’s like when you go and buy a house and you collateralize your house with a mortgage company, and then the house drops down significantly in value.
Well, your loan is higher than the value of the house. And in this particular case, what happened, the government came in and said, “We’re going to make you whole.” Well, the government actually made money.
Decline closely followed a runup that came months after President Franklin Roosevelt issued a proclamation in March, suspending U.S. banking activity for several days. Now, if you want to scare somebody in the stock market, just tell them, “We’re going to suspend banking activity.”
JW: Yeah. And of course then what does everybody want to do? They want to run and take their money out of the bank.
PW: Yeah. In this particular case, the stock market values drop because if banking activity slows down, people can’t pull their money out and buy stuff. And if they can’t pull money out and buy stuff, companies can’t make profits.
That’s how stocks are valued, in the profits of the company. And that’s basically what happened. People forget with stocks, you have sales of things minus cost of goods sold, minus operating expenses, minus interest expenses, minus taxes that get you to earnings.
something like this would be the market looking at it, going, “Well, earnings are directly likely to be affected by this. And how much are they going to be affected?” And nobody really knows.
So what happens is stock prices drop because the only people willing to buy the stock are people that are going, “Well, eventually these banks will open back up, probably, and it’s likely.” And you don’t really know, but you hear the news and you go, “Wow, this sounds bad. And this could be really, really bad. Hence, I don’t think I want to be the holder of these companies because if it goes really, really bad, I’d rather somebody else take the hit than myself.” Because we’re really nice as humans that way.
Well, the New York Stock Exchange stopped trading. It was one of those days that they actually stopped trading stocks for more than a week, as well in March, 1933, and July 18th, the Dow hit double the level it had been in March just before the exchange’s 11 day shutdown.
The next one is December 1st, 2008. Oh, so 2008 made the numbers again. Once again, the 2008 downturn, that was a scary year.
I remember doing so many videos, and December of 2008 was that one month that I did 33 videos. And only 31 days in the month, and I did 33 videos trying to keep investors calm so that our clients didn’t go into total panic meltdown mode.
It was all in the name of helping people not get into panic mode because the market, of course, the next year did quite well. So I was glad I did.
So this tumble came during the Great Recession, which the Fed dates from December, 2007 through June of 2009. Remember the recession ended in June of 2009. But remember the market upturn really started in March of 2009.
It was then that a huge runup in the market happened, but the recession hadn’t ended yet. That’s one of the lessons, is that we can still be in recession with the stock market shooting up like crazy.
During the downturn. S&P fell 57% from October of 2007 through March of 2009, which I just referenced. U.S. household net worth slipped significantly. So that was another big one. Now about 9%. Imagine you got $1 million, and well, imagine a 57% downturn.
JW: Oh, yeah. Major drop, brutal. In 2009, you couldn’t find anybody that had anything positive to say about anything.
PW: Oh yeah. It’s so true.
The next one we had after December 1st, 2009 is October 15th, 2008. We had lots of scary days in 2008, troubling data and comments. It was over a 9% drop in the market.
JW: That was the time I remember being the toughest, was that October, September time of that year.
PW: Well, I remember seeing, Jim, that particular year, 2008 was the greatest viewership that CNBC had ever had. So it was something that really, really helped them significantly from a rating standpoint, because people wanted what? A prediction about the future. “Where is this leading? What is going to happen next? When’s the shoe going to drop?”
JW: The Depression is one thing that tends to get trotted out whenever things are bad. They’re always going to squeeze some comparison into some other bad thing that happened, trying to get people to ask, “Are we going to be okay? And when are we going to be okay?”
PW: Right. Our next one is October 18th, 1937. Again, a little bit over a 9% drop. Do you see a theme here? A lot of things right around the 8% to 9% in one day.
I was just noticing that a lot of these drops were that big, in one single day. A drop occurred during the recession that lasted from May of 1937 to June of 1938. And by the way, there are several days, single days where the market went up more than 9%.
I remember some days like 15% jump in a single day. So you look at this, and see how big they drop, and say, “Well, it takes forever for them to come back.” And no, that’s not actually true. A lot of times they can come back pretty rapidly as well.
A drop occurred during a recession that lasted from May of 1937 through June, 1938. And of course, you think back to that time, we were getting ready to run into World War II as well. So that was pretty significant.
The nation’s output product fell by 10% and the unemployment rate reached 20%. Imagine one out of five people are out of work, and looking around, and going, “Is this ever going to end?” One in five people that are looking for jobs are out of work at that point in time. So you know that there was a lot of fear out there at that point in time.
PW: Next one, March 12th of 2020. Of course, now we get into COVID area, don’t we? 9.51%. There we go.
A day after the World Health Organization declared COVID-19 a pandemic, the stock market endured its worst day since Black Monday of 1987, which we haven’t gotten to yet. In 2020, circuit breakers, a mechanism put in place after the 1987 market crash triggered by 7% market index drops from the previous days, paused trading on March 9th, 12th, 16th, and 18th.
If you think about it from a psychological standpoint, there is some sense to that.
What happens is they don’t necessarily connect to the frontal part of our brain, which is the thinking part of our brain, that rapidly it takes some time for those signals to travel.
The next day that comes in the 13 scariest days in the stock market is November 6th of 1929. Again, Jim, guess how much the market dropped that one day?
JW: I’m guessing somewhere around 10%, say 9% or something.
PW: Wow, you’re so good. 9.92%. Yep. Pretty close to 10%, too. The day that, after Black Tuesday, the stock market rallied, logging one of the better days with more than a 12% rise in the Dow. The enthusiasm was short-lived.
A week later, the stock market experienced one of its most stomach dropping tumbles, 9.92% in 1929. And I remember reading about it. There was a guy, a CEO of one of the major car manufacturers at the time, who said, “I got out of the stock market before this tumble.”
He then proceeded to buy back in. And then the market kept going down because 1929 wasn’t the end of it. You had 1930, 1931, 1932.
And I’ll never forget the line in this documentary, “This person was never to be important on Wall Street again.” It’s one of my favorite lines. Why? Because that dip wasn’t a dip. That was just the beginning of a huge decline in the stock market.
The next one was October 29th of 1929, the market went down another 10%. The fourth scariest day for the U.S. stocks based on the S&P 500 performance. Black Tuesday was a key component in the 1929 crash that helped spark the Great Depression. The stock market lost $14 billion, which is a drop in the bucket these days.
JW: That’s all?
PW: See, the next one is going to be March 16th, 2020. Hey, Jim. Oh, how far do you think the market went down?
JW: 10%?
PW: You’re close, but not quite right is 11.98%. So this was about 12%, a little bit higher on this particular day. This was back in the COVID pandemic again.
Another, let’s see, October 28th of 1929. Okay, how much down, you think?
JW: Well, since the last one was 11%, I’m going to go for 13%.
PW: Oh you are good. The Dow plunged nearly 13% on this day, dubbed Black Monday. By mid-October 1929, it had lost almost half its value.
Just put yourself, folks, into that position that you have a downturn that wipes out half of the value of your investments, and you’re looking around, and you’re seeing people in soup lines, you’re seeing people lining up for bread, you’re seeing unemployment rates that are out the roof, banks are collapsing.
You’re seeing companies going out of business. You’re seeing Wall Street executives selling their cars. Remember that picture of the car where the guy’s got his leg up on the car and he’s selling the car for just a song and a dance.
JW: Yeah. And one thing about this, too, there were no radio shows like the Paul Winkler Show to help process all this stuff either. People are just panicking based on whatever they’re getting in their printed papers.
PW: Right.
By mid, let’s see, they said that the market lost about half its value, according to the Fed, which noted that the epic boom of the 1920s had ended in a cataclysmic bust.
In the 1920s, people were so optimistic about where things were going, what was happening, everyone thought it was never going to end.
By mid 1932, the Dow hit its lowest level of the century, nearly 90% off its peak. 90%. Just put that in your head. It didn’t regain lost territory for more than 22 years.
That is actually wrong, because if you look at dividends, it didn’t regain the price territory for 22 years. If you look at the actual return, it regained pretty much everything by the end of 1936, if you look at the return of the market over that period of time.
But a lot of people hear that and hear, “Oh, the market went down, and it didn’t regather.”
No, you’ve got different components of returns of stocks. Part of the component of the return of stocks are dividends of the companies. Companies paid a lot higher dividends back then.
So actually not quite totally on the ball on that particular one. And the final one, you know what this one’s going to be, right?
JW: 20%.
PW: 20%. You nailed it, man. You got it. October 19th of 1987, a 20% decline. This occurred just before I got into the industry.
Black Monday of 1987 brought the first contemporary global financial crisis, which also saw the Dow Jones Industrial average drop 22.6%.
The Federal Reserve Bank of Chicago noted, “It remains the biggest one day market decline ever, surpassing the 1929 Black Monday crash associated with the Great Depression. Experts have attributed the crash to various factors, including the rise of stock options in derivatives and a rapid run up and prices fueled partly by foreign investors.”
And those are the circuit breakers we were talking about a little bit earlier. And those circuit breakers, there is a psychological aspect to those circuit breakers, but that was a big decline. And it wasn’t that long after you had a meteoric jump in the stock market right after that happened. So that was one that didn’t last all that long.
JW: I want to add two things on this is, one is that we’re going to have more of these somewhere along the line. There will be more days like this.
Also, what does one day, good or bad, mean towards a multi-decade, goal-focused retirement?
PW: No, it should not be the thing that makes or breaks. One of the things I want you to remember is that stock markets have had, like Jim is saying, lots of declines.
And how many of them have they recovered from? Historically, 100%. People think, “It just takes too long. It takes forever.” No, actually it does not.
When you look at history, it takes days to recover, not years, typically, when we look at stock market recoveries.
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