After decades of predictions, warnings, wagers, prophecies, and what must be many trillions of dollars expended upon short sales, long puts and written calls, hedges and directional bets of every sort: the long-awaited “big Kahuna” – a crash in equities markets – came yesterday.
The Dow Jones Industrial Average closed down 2,997 points to 20,188: a -12.93% one-day decline.
I remember the Crash of ‘87 (-22.6% in one day), although I wouldn’t reach the trading desks in the canyons of Wall Street until a bit less than a decade later. My family didn’t have any investments and I really didn’t know what to make of it – other than some people in my blue collar, suburban neighborhood seeming to experience a sudden bout of profound, hideous schadenfreude at the “capitalist pigs.” I read a bit about it, but resources and life being what they were then, my interest soon faded.
Others, mostly in the media, worried that a recession would shortly follow. One did, but by the time it arrived the Dow Jones Industrial Average was far away from those lows. I was far away, too: Hundreds (and sometimes thousands) of miles from New York City and New Jersey, and about as far from financial markets, derivatives, and trading as one can get: as an infantryman in the United States Army. Markets, the crash, all of it – never part of my life, anyway – couldn’t have been further from my mind.
Some years later I returned: not just to the tri-state area, but to the very arenas which not many years before I had heard so much ire and loathing directed at. The Dow was at 5,000, a handful of new “dot com” stocks were undertaking initial public offerings and vaulting to supreme heights on their first day of trading. (“Don’t get used to this; it’s not usually like this,” was the advice frequently offered by older traders.)
Far from being uncommon, volatility came frequently, whether in certain sectors or hitting the entire market. There were concerns about the market rising too quickly, or too slowly; there were debates over valuation, then debates over the debates over valuations; and then a few years in a private hedge fund in Connecticut with a Nobel Prize winner or two as advisors got in big trouble and I saw real market turmoil: rarely the worse for wear, but over time wiser, gaining experience.
There must have been some point at which I asked, or was told, or read, what a “crash” was. Today, any time the market declines sharply, a few hundred points, it’s breathlessly described as a crash. What I was told – now decades ago – is that a crash is a decline of more than 10% in a single trading session. Most of what have been called “crashes” have not been. Not the decline when markets re-opened after 9/11 (-7.13%); not the sudden drop when the bailout bill was rejected on September 29th, 2008 (-6.98%); not the May 6, 2010 “Flash Crash” (which doesn’t even register in the top 20 of point losses or percentage losses); and certainly nothing that was predicted the day that Trump unexpectedly defeated Hillary Clinton in the 2016 Presidential election. (The day after the election, US equities rose slightly more than 1%.)