It's been 90 years since Black Thursday rattled investors and put the 1929 stock market crash in motion. Looking back holds important lessons even today.
On Oct. 24, 1929, the Dow Jones Industrial Average dropped 11% intraday before bankers stepped in and provided buying support. That propped up the market until it finally crashed for good: Plunging 12.8% on Oct. 28, 1929 (Black Monday) and 11.7% on Oct. 29 (Black Tuesday). Those two days of selling still rank as the No. 2 and No. 3 worst percentage drops in Dow Jones Industrial Average history (the 22.6% drop on Oct. 19, 1987 is the worst).
It took 25 years for the Dow "to get back to breakeven from the Crash of 1929," says Sam Stovall, chief investment strategist at CFRA.
What can investors learn from the crash?
Stock Market Crash: Recoveries Happen Much Faster Now
Lacking up-to-date market data in 1929, investors spread stories about the likelihood of a stock market crash even before it actually happened, Robert Shiller, professor of economics at Yale and author of the book, "Narrative Economics" said Wednesday at a meeting for investors in Los Angeles.
"There were a lot of people before the crash and 1929 who were saying openly, this market is going crazy. It's just getting too high. And that was one of the viral stories at that time. It was a self fulfilling prophecy that generated the 1929 crash," he said.
But now, the increased speed of trading allows stock prices to adjust to new information much more quickly.
That's good news for investors who don't have time or patience to wait nearly three decades to get their money back after a meltdown. It's also help for investors to mentally and financially prepare for what to expect when the market sells off.
It's only taken 14 months, on average, for investors to break even following the 12 bear markets since 1945, Stovall says, based on the S&P 500. And even following 40% or greater "Mega-Meltdowns," investors got their money back in 58 months, or less than five years.
Most recently, it took 49 months to recover from the 57% meltdown in 2007-2009 and 56 months following he 2000-2002 bust.
|Type of Decline||Number of occurrences||Average % decline||Duration of decline (months, average)||Recovery (months, average)|
|Minor pullback (5% to 9.9%)||58||-7%||1.2||1.5|
|Correction (10% to 19.9%)||23||-14%||4.4||3.8|
|All Bears (20% or more)||12||-33%||13.8||25|
|Typical Bears (20% to 40%)||9||-26%||10.8||14|
Sectors Follow A Playbook In A Stock Market Crash
The consumer staples, health care and utilities sectors win fans during times of uncertainty for a reason. Their more stable earnings give them more ballast during difficult times for the market.
Investors followed the playbook this year, too. Investors hunkered down from recession fears several times — stoked by an inverted yield curve and trade disputes. Since April 30, when the market turned a bit choppy, the Utilities Select Sector SPDR Fund (XLU) rose 9.6%, Consumer Staples Select Sector SPDR (XLP) gained 5.9% and Health Care Select Sector SPDR (XLV) added 3.5%, even as the S&P 500 (SPY) flatlined with a scant 1.5% gain and the Energy Select Sector SPDR (XLE) fell 11%.
Such behavior is predictable from looking at past periods of weakness. Consumer staples, health care and utilities stocks outpaced the market in 83% of bear markets since 1946.
|S&P 500 Sector||Average % Ch.||Rank||Freq. of outperformance|
October Gets A Bad Rap
The month of October scares investors as major crashes occurred during the month. But since 1946, October turned into a "bear killer" month, says Stock Trader's Almanac. Buying in October "turned the tide" in 12 bear markets after the second World War.
It's not even the worst month anymore (it ranks seventh). Big October gains followed "atrocious Septembers" from 1999 to 2003.
On average, the S&P 500 is up 59% of the time in October. There are even stocks that thrive in October, making it a potentially good time to buy.
Strategies Exist To Control Stock Market Crash Volatility
Buy and hold is certainly a good approach for long-term investors, especially if you own diversified funds. And if you don't want to hold through downturns, knowing to cut losses is a prudent idea to preserve gains.
But don't overlook new strategies to help control losses.
The Innovator S&P 500 Buffer ETF (BJUL) gives investors up to a capped level of gains, while reducing initial losses over one year by 9%. It's part of a flurry of new ETFs designed to help investors tamp down volatility with little effort.
The iShares Edge MSCI Minimum Volatility ETF (USMV) and Invesco S&P 500 Low Volatility ETF (SPLV) are two of the largest and fastest-growing funds, says CFRA. The iShares ETF, for instance, looks at how closely various stocks move in comparison with each other to create a "minimum variance" portfolio.
Typically defensive stocks that pay dividends are found in the iShares volatility-fighting portfolio. Consumer staples like McDonald's (MCD), Coca-Cola (KO) and PepsiCo (PEP) are top holdings at 1.5% apiece. The ETF, which charges 0.15%, saw its assets balloon to $30 billion this year, from $3.6 billion in 2014.
So while history may or may not repeat, you now know what to expect and tools that can help your portfolio survive.