Will Wall Street Repeat the History of 1929, 1987, or 2007-2008?

Mar. 20, 2020
Bob Adelmann

When investors receive their brokerage statements at the end of the month, and workers see their 401(k) plan and IRA balances, they'd better be sitting down. For those who thought they'd put away $10,000, their balances are now $6,600. For those who had $25,000 socked away, they now have $16,500. For those with $50,000, their balance is now $33,000. For those who thought they had $100,000 parked safely away, they now have just $66,000.

After recovering from the shock, those investors and plan holders are going to be asking: How much worse is it likely to get? How long before my accounts start to grow again? Will we ever see new highs again?

Analysts are prone to look out the rear view mirror when trying to answer such questions. Will Wall Street do a repeat of the period that followed the Roaring Twenties?

The great bull market run during the Roaring Twenties pushed the Dow to an all-time high on September 3, 1929. When investor Roger Babson warned two days later that, "Sooner or later a crash is coming, and it may be terrific," the market lost three percent.

Two weeks later British investor Clarence Hatry and several of his associates were jailed for fraud and forgery, which unnerved American investors.

On October 24 the market lost 11 percent of its value, earning that date the title of "Black Thursday." Over the weekend many investors decided it was time to take some profits. The selling on Monday, October 29, pushed the Dow down nearly 13 percent, giving that date the title of "Black Monday."

The next day there was so much selling (partly due to margin calls on investors who had borrowed money to buy stocks) that for some stocks there were simply no buyers at all, and the Dow dropped another 12 percent, a decline of 25 percent in two days.

The market briefly stabilized, then began a long, slow, agonizing descent that ended in July 1932 with the Dow losing 89 percent of its value in less than three years.

Or will Wall Street follow the 1987 model?

On Monday, October 19, 1987, the Dow lost 22 percent, earning that date the same sobriquet as in 1929: "Black Monday." That crash was preceded by significant volatility the week before, causing investors in mutual funds to redeem their shares over the weekend. Under rules then in force, those mutual funds allowed shareholders to sell at Friday's closing prices.

When the market opened on Monday, there was a huge wave of selling by those funds that overwhelmed the market. Orders to sell were sometimes delayed for more than an hour before being executed. Large fund transfers were delayed for hours, and various trading platforms shut down under the selling pressure.

Or will Wall Street instead do a repeat of the Great Recession?

The Great Recession of 2007-2008, covered more than adequately in the film The Big Short, was caused by easy money policies of the Federal Reserve. History reminds investors of such concepts as "sub-prime mortgages" and "collateralized debt obligations" that have faded with the passage of time.

The Dow touched an all-time high of $14,000 in October 2007. It then entered a long, slow, and painful decline, hitting a trough of $6,600 in March, 2009.

How much can be drawn from these disastrous and mind-numbing declines? What lessons can be learned? One: the Federal Reserve had a role, often a decisive one, in pumping up the markets. Two: the economy had been operating at nearly full capacity before the declines. Three: investors had become complacent, expecting gains to continue indefinitely. When the markets dropped, many were caught short (both literally and figuratively). Fourth: most had no backup plan.

What's different this time? Until recently the Fed has remained quiescent, actually reducing slightly its enormous balance sheet by not reinvesting funds received when its treasuries matured – a form of quantitative shrinking. The economy has been on a tear thanks to policies instituted by the Trump administration, making its recovery from the last bear market the longest in history.

What remains the same? Complacency. Precious few investors or workers have taken time to consider that it's all a bubble just waiting for an excuse, such as the coronavirus, to pop. Fewer still are those considering Plan B when that bubble pops.

Prudence dictates that investors consider the bubble, and plan accordingly. That means holding alternative investments that remain aloof from the machinations of the Fed, the government, or the economy.

Those investors looking for a bottom in order to get back in to ride the next wave up should also be considering their options if it doesn't. And to put aside sufficiently to ride out the next storm.

Psalm 19:7-11 is helpful here:

The law of the Lord is perfect,
reviving the soul;
The testimony of the Lord is sure,
making wise the simple;

The precepts of the Lord are right,
rejoicing the heart;
The commandment of the Lord is pure,
enlightening the eyes;

The fear of the Lord is clean,
enduring forever;
The rules of the Lord are true,
and righteous altogether.

More to be desired are they than gold,
even much fine gold;
sweeter also than honey
and drippings of the honeycomb.

Moreover, by them is your servant warned;
in keeping them there is great reward.

If, as this writer has suggested in this space on Wednesday, the virus is less virulent than many expect, and peaks sooner, that temptation to get back in may happen soon.

On the other hand….


An Ivy League graduate and former investment advisor, Bob is a regular contributor to The New American primarily on economics and politics. He can be reached at badelmann@thenewamerican.com.


The McAlvany Intelligence Advisor: Coronavirus Is Far Less Virulent Than the Flu, Say Experts

CNBC.com: Dow wipes out gains under Trump's presidency, still slightly positive since his election

ChicagoTribune.com: Dow closes below 20,000, erasing nearly all its gains since Trump took office

MarketWatch.com: 3-month chart of the DJIA

History of Black Monday, October 19, 1987

Wall Street Crash of 1929

Financial Crisis of 2007-2008 – the Great Recession

CBS: How Many Americans Have A 401k? What's The Average Balance?

Money: 10 Years Later: Have This Year's Retirees Recovered From the Great Recession?

Background on Roger Babson

The Big Short

Psalm 19 (ESV)

Add new comment

Plain text


McAlvany Weekly Commentary provides investors with valuable monetary, economic, geo-political and financial information that cannot be found on Wall Street. Your host David McAlvany presents a solid strategy of wealth preservation for your financial and retirement assets while living in an unstable economy.

Through its client focused, customized approach, MWM is committed to providing independent, well-researched, objective advice, and investment professionalism. At MWM, our client commitment is to preserve capital, manage risk, and grow your assets in an ever-changing global environment.

At International Collectors Associates (ICA), we specialize in the sale of bullion, semi-rare U.S. and European gold coins and secure offshore storage in Switzerland for your precious metals. Our highly trained and experienced advisors strive to help you in customizing solid strategies of wealth preservation for your financial and retirement assets.

McAlvany Financial Group

The McAlvany Financial Group has a contrarian, in-depth approach to its analysis, allowing the company to avoid decisions based on emotion, and thus combine maximum risk mitigation with consistent real growth for its clients’ investments. Integrity, attentiveness, and longevity have characterized the company’s client relationships since 1972.