Now the really big picture. Reflecting the severity of the market downturn that began in late 2007, the 4 year average (50 month) of the S&P500 index is getting close to crossing below the 17 year (200 month) average. Remember, this is years. In the normal course of affairs, inflation tends to keep the shorter average above the longer average. The crossing or “nearing” of these two averages reveals just how sick the past decade has been. The last time the market showed this indicator of prolonged market weakness was in the first half of 1978, after a 43% market drop in the bear market of 1973-74 and a 19% drop in 1977.
In the last 60 years, was the October 2008 market drop of 17% the deepest monthly plunge in equity prices? No, that honor goes to the almost 22% dive in October 1987. For a consecutive 3 month drop, 2008 does barely nudge out 1987, both falling 30%.
Although headlines will speak of the downturn in the Fall of 2008 as the worst since the depression, it is important for Boomers to remember that our parents’ generation suffered through some pretty severe market declines as well. In 1987, most Boomers were in their thirties and probably had relatively few dollars in the stock market. We may remember “Black Monday”, October 19, 1987, for the headlines but it was not as personal as the 2008 decline because we were decades before retirement and had less at stake. What particularly distinguishes the two years is that the unemployment rate continued to fall during the 1987 decline.
Young people don’t remember market crashes the way that older people do. When we are young, we have – like forever – before we are going to be old. For the echo boomer generation born in the eighties and nineties, also known as the “millennials”, or Generation Y, the crash of 2008 will be a faint or non-existent memory when they reach their fifties decades from now. They will probably get to have their own crash – one that they will remember because they will have more at stake.
When we are in our twenties, someone should prepare us. We are going to work hard and save money. We are probably going to put some of that hard earned money in the stock market. Then, when we are in our fifties, sixties or seventies, we are going to flip out when our stock portfolio drops by 40%. Would we listen to or remember that sage advice? Probably not.