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Many stock investors are too young to remember Black Monday in October 1987 — why that’s a problem

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At some point over the next century, the stock market will lose more than 20% of its value in a single day. Maybe this doesn’t seem like useful advice, but the fact is that you’re kidding yourself if you think market crashes of such magnitude won’t happen again.

This sobering thought coincides with the 33rd anniversary of the 1987 U.S. stock market crash. On Oct. 19, 1987 — Black Monday — the Dow Jones Industrial Average
DJIA,
+0.39%

  lost 22.6%. It was the worst one-day percentage drop in U.S. stock market history. If a similarly-sized crash were to occur today, it would take about 6,500 points off the Dow in just one trading day.

Many regulatory reforms were instituted in the wake of the 1987 crash (as well as following other big subsequent drops, such as the so-called Flash Crash in May 2010). As a result, many investors have comforted themselves that another crash won’t happen.

That’s false comfort, according to research conducted by Xavier Gabaix, an economics professor at Harvard University. Two decades ago, along with three physicists at Boston College, he derived a formula that predicts the frequency of big daily changes over long periods of time. Though that frequency is low, it isn’t zero.

Read: This is the last chart investors need to see ahead of the ‘Black Monday’ market crash anniversary

Gabaix and his fellow researchers presented their research in December 2002 in the scientific journal Nature. To appreciate the model’s forecasting ability, consider that from that date until now — a period of 17.8 years — the formula would have predicted that there would be three days in which the market rose or fell by at least 10%. How many such days has the S&P 500
SPX,
+0.01%

 experienced since December 2002? Three.

This casts a different light on the huge volatility the stock market experienced in March 2020 as the stock market reacted to the COVID-19 pandemic — including the S&P 500’s 12% plunge last March 16. People’s natural reaction at the time was to focus on the historically unique and idiosyncratic causes of that crash. While understandable, this reaction also overlooked the reality that a drop of such magnitude was inevitable, sooner or later.

Since a 17.8-year period is not long enough to illustrate the predicted frequency of plunges as big as the 1987 Crash, the chart below focuses on the past century. Notice that the researchers’ model does an impressively good job of matching what actually happened.

To be sure, the researchers’ model doesn’t predict when these big daily market changes will take place. It instead specifies their frequency over long periods. So it’s entirely possible that Wall Street could go for decades without experiencing another crash like 1987’s, or suffer another one in the next year. The point of the model is that, when it does happen, we shouldn’t be surprised.

There’s a loose analogy here with pandemics. Scientists have been predicting for years that a pandemic was not a matter of if, but when. Yet, since the odds of a pandemic in any given year were so small, it was hard to get many people interested in planning for how to react when the inevitable came to pass. In retrospect, it’s clear that we all would have been well served by better planning.

The same goes for investing. It’s been more than 30 years since the 1987 Crash. People who belong to generations Y and Z were either not born at that time or not old enough to have any real memories of it. Most Gen Xers were not even out of college. No wonder it’s difficult to get most of us to spend much time imagining how we might arrange our portfolios to survive another crash.

In other words, today’s market is dominated by investors who are too young to remember the 1987 crash. I’m reminded of what Adam Smith, the pseudonymous author of the late 1960s classic book “The Money Game,” called a “kids’ market.” He used that phrase to refer to speculative bull markets in which the advisers and traders making the most money are those too young to remember prior crashes. “Memory can get in the way of such a jolly market,” Smith wrote. 

Smith described a friend of his on Wall Street called “The Great Winfield,” who exploited kids’ markets by only hiring investment managers who were not yet 30 years of age: “The strength of my kids is that they are too young to remember anything bad, and they are making so much money that they feel invincible. Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes [the rest of] us” who are old enough to remember.”

You might object to this analogy on the grounds that the stock market in March suffered its worst waterfall decline in U.S. history. Surely those memories are still fresh? But that decline is not what Winfield had in mind, since the stock market so quickly recovered. Today’s “kid” investors have filed away their memories of what happened in March under the category of “brief pause in the market’s inexorable march to new highs.” That’s hardly the kind of memory the anticipation of which “freezes” us.

Contrast this year with what happened between January 1973 and January 1985. At the end of that 12-year period, according to data from Yale University finance professor (and Nobel laureate) Robert Shiller, the stock market was no higher than where it was at the beginning on a dividend-adjusted and inflation-adjusted basis. Investors who lived through that dozen-year period were so traumatized that many swore of equities for the rest of their lives. The 1987 stock market crash had a similarly traumatic effect.

So if you are old enough to remember the 1987 Crash, memory will serve you well as you judge what kind of risk is appropriate. If you aren’t old enough, then you need to pay especially close attention to the academic studies which conclude that another crash is someday inevitable.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Value stocks are poised to crush growth stocks after the presidential election

Plus:  The stock market’s strength tells us less about the true state of the economy than at almost any other time over the last five decades



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My ex-wife passed away. I’m the beneficiary on her life insurance. Her family wants me to pay her funeral expenses and won’t leave me alone

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I am 32, and just a month ago I found out that my ex-wife, whom I haven’t spoken to since we divorced, passed away tragically in a moped accident. My ex-wife had life insurance through her job. My ex-mother-in-law informed my father that my ex-wife had kept me as her beneficiary on her life-insurance policy, and her family wants the money for funeral costs, bills, etc.

Not only did my ex-wife have me on her policy as the primary (and only) beneficiary, she updated my home address on the policy after we divorced. Also, I found out through the insurance company that my ex-wife had two term life-insurance policies, one for me and one for my ex-sister-in-law.

I blocked my ex-in-laws, and now I received a threatening voicemail from a blocked number, so I’ve taken it upon myself to notify the authorities. I live in New York, I am remarried, and my divorce was very simple and easy. We left the marriage with what we came into it with. The life-insurance company approved the check in my name, and is sending it to my home.

Am I legally in the clear? I have not spoken to or bothered these people once since we divorced five years ago. I just want to be left alone and move on with my life.

Thank you very much in advance.

Best regards,

Fed-Up Ex-Husband

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.

Dear Fed Up,

First, I’ll deal with your life insurance concerns, and then the subject of your ex-wife’s funeral expenses.

The life-insurance policy was between your ex-wife and her insurer. It’s possible to overturn a life-insurance policy if it explicitly goes against the terms of a divorce decree, as happened in this case, but that too was a complicated lawsuit. Some states do have statutes that can revoke such beneficiary arrangements.

In “Kaye Melin and Metropolitan Life Insurance,” the children of the deceased were awarded the proceeds from the life-insurance policy, not the ex-wife who was named as beneficiary on the agreement. In that case, the law presumed that what her ex-husband wanted after their divorce was incorrect.

The ruling stated: “Thus, if a person designates a spouse as a life insurance beneficiary and later gets divorced, Minnesota law provides that the beneficiary designation is automatically revoked. At least twenty-eight other states have enacted similar revocation-upon-divorce statutes.”


‘I’m reluctant to say that you are ‘in the clear,’ given previous court rulings, and statutes in some states on the revocation of named beneficiaries post-divorce.’

I’m reluctant to say that you are “in the clear,” given previous court rulings, and statutes in some states on the revocation of named beneficiaries post-divorce. In your case, it seems clearer that your ex-wife wanted you to be the beneficiary. She did, as you say, update your address. It would be hard to see a more explicit sign of her intentions than that.

“Unless the policyholder of the life-insurance plan changes the beneficiary designation officially, the people originally named will remain the beneficiaries through the life of the policy,” according to Heban, Murphree and Lewandowski, a law firm in Toledo, Ohio. “Even if the policyholder was not on speaking terms with the individual upon his or her death, that beneficiary would still receive the income.”

“In the case of someone who divorced and remarried, the policy may name the first spouse as beneficiary. If the policyholder never changed the policy to reflect the divorce and remarriage, the ex-spouse could end up with the benefit. This can cause the current spouse and any children from the second marriage to dispute the beneficiary designation on the policy,” it adds.

But much, I suspect, would depend on what state you live in, and the specifics of your case.

On a separate issue, it’s difficult to glean from your letter whether your in-laws had little funds to pay for the funeral expenses, or were mad as hell that you were listed as beneficiary and felt you should contribute, or both. On the one hand, it seems like they are not in a state of mind to be reasonable and, chances are, if you did engage it would lead to further demands and acrimony.

Perhaps you could talk to your ex-wife’s lawyer and see if there is enough money to cover the costs of her funeral and, if not, you could make a contribution. But given the alleged harassing phone calls, their anger and grief, and their antipathy toward you, you would need to have all correspondence go through the attorney and refrain from any direct communication.

There is no excuse for their taking their grief out on you. Still, spare a thought for her family. If you are fed up, imagine how they feel.

The Moneyist: My boyfriend talked me into depositing my paychecks into his bank account, and paying for a car in his name. What can I do?

Hello there, MarketWatchers. Check out the Moneyist private Facebook
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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.





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These money and investing tips can help you when inflation is burning a hole in your wallet

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, focus on helping you make sense of the recent spike in U.S. inflation. Understand how rising prices can affect your investment portfolio, and taking appropriate steps now to respond, can prevent unpleasant surprises later.



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No, you’re not crazy. Yes, CDC mask guidelines are confusing — should you stop wearing a mask in public or not?

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Wear a mask. Don’t wear a mask. Make one. Buy one. Wear it outdoors. Wear it indoors.

Confused? You’re not alone.

So what’s the deal with the CDC’s new guidance? “Anyone who is fully vaccinated can participate in indoor and outdoor activities, large or small, without wearing a mask or physical distancing,” Dr. Rochelle Walensky, the director of the U.S. Centers for Disease Control and Prevention, said on Thursday. “If you are fully vaccinated, you can start doing the things that you had stopped doing because of the pandemic.”

Vaccines have helped to slow the spread of the coronavirus, and this appears to be a natural next step for Americans tired of masking up. “We have all longed for this moment when we can get back to some sense of normalcy,” Walensky said.

We are still far, far away from normal. You can take off your mask “except where required by federal, state, local, tribal, or territorial laws, rules and regulations, including local business and workplace guidance,” the CDC says. You still need a mask on buses and trains, in museums and most stores, possibly at your place of work, but not inside restaurants, except when you’re going to the rest room.

How do you know a maskless person is vaccinated? It’s an honors system. The CDC guidance gives less reason for people to abide by that old American Express slogan: “Don’t leave home without it.” People are leaving home without their masks, even in states that still require everyone — vaccinated or not — to wear them in outdoor public spaces, including on the streets of New York.

Many people are fed up, it seems. Little wonder: The CDC’s announcement took many health professionals by surprise: According to a New York Times survey, 29% of epidemiologists surveyed thought people would be wearing masks in public spaces for at least aanother year, while 26% said they believed people would do so for another year, and 26% said they thought mask wearing would continue in some form from now on.


‘You still need a mask on buses and trains, in museums and most stores, possibly at your place of work, but not inside restaurants, except when you’re going to the rest room.’

The change in CDC mask guidelines comes just over a year since the CDC said everyone should wear masks. In April 2020, the Trump administration and the CDC reversed their policies on face masks, and said all Americans should wear cloth face coverings and not — as officials previously said — just medical workers. Trump cited “recent studies,” while the CDC cited “new evidence.”

Fast-forward to Thursday. “I think it’s a great milestone, a great day. It’s been made possible by the extraordinary success we’ve had in vaccinating so many Americans so quickly,” a maskless President Joe Biden declared in the White House Rose Garden declared, citing the vaccines from Johnson & Johnson
JNJ,
+0.15%

Pfizer-BioNTech
PFE,
-0.20%

and Moderna
MRNA,
+7.68%
.

“It’s going to take a little more time for everyone who wants to get vaccinated to get their shots. So all of us, let’s be patient with one another,” the president said.

Forgive the public for having mask rules fatigue. We’ve been on quite a journey. Studies earlier in the pandemic suggested that adopting the practice of mask wearing, one that was already accepted in many Asian cultures, would have saved tens of thousands of lives. Many Americans were understandably frustrated, but also eager to do anything they could to stop the virus.

‘So what’s the deal with the CDC’s new guidance?’


MarketWatch illustration

Flashback: Dr. Nancy Messonnier, director of the Center for the National Center for Immunization and Respiratory Diseases, said in a briefing on Jan. 30 last year, “The virus is not spreading in the general community. We don’t routinely recommend the use of face masks by the public to prevent respiratory illness. And we certainly are not recommending that at this time for this new virus.”

Three months later, New York Gov. Andrew Cuomo, a Democrat, ordered all New Yorkers to cover their faces in public when they can’t maintain a proper social distance. “You’re walking down the street alone? Great! You’re now at an intersection and there are people at the intersection, and you’re going to be in proximity to other people? Put the mask on.”


‘These are just guidelines from the CDC. It’s up to the states to decide what to do next. New Jersey and New York still maintain their mask guidelines in public spaces.’

The CDC’s latest mask announcement are just guidelines. It’s up to the states to decide what to do next. And that’s a whole other story. New Jersey and New York still maintain their mask guidelines when in public spaces. Gov. Phil Murphy, a Democrat, is examining the guidelines, a spokeswoman for his office said in a statement. Murphy, like many governors, wears a mask in his Twitter profile. Perhaps that tells us all we need to know.

Roughly half of U.S. states have some mask mandate. Alabama, Louisiana, South Carolina, Florida, Mississippi, Nebraska, and Texas, among others, had already removed their statewide mask mandates in public spaces and/or had not instituted one. Florida Gov. Ron DeSantis, a Republican, said Thursday he would grant clemency to gym owners who broke the mask mandate.

Texas Gov. Greg Abbott, a Republican, officially ended his state’s face-mask mandate in March, and allowed businesses to reopen, despite opposition from rival lawmakers and health professionals at the time. Gilberto Hinojosa, chairman of the Texas Democratic Party, described the move as “extraordinarily dangerous” and said it “will kill Texans.”

Cuomo, meanwhile, perhaps still reeling from this time last year when New York was the epicenter of the pandemic in the U.S., was definitive in maintaining current policy. Keep your masks on. “In New York, we have always relied on the facts and the science to guide us throughout the worst of this pandemic and in our successful reopening,” he said in a statement.


‘People take off their masks to make phone calls on the street in states where there is a mandate to wear them in public places, and they take them off while they are sitting outdoors eating.’

Vermont Gov. Phil Scott, a Republican, said his state will follow the CDC guidelines. “Later today, we’ll be updating Vermont’s mask mandate following the CDC’s updated guidance, announced yesterday,” he tweeted Friday. “This will mean those who are fully vaccinated no longer need to wear masks — indoors or outdoors — nor do they need to be concerned with physical distancing.”

In Nevada, Gov. Steve Sisolak, a Democrat, said the state updated its own policies on mask wearing to follow the CDC’s guidelines with immediate effect. Nevada Health Response added: “COVID-19 is still very much a threat in our State and many Nevadans may choose to continue using masks based on their and their families’ personal health concerns. Others should respect this choice.”

That statement, perhaps more than any other, illustrates the tension, fear and frustration not only with state laws and changing guidance, but with each other. People take off their masks to make phone calls on the street in states where there is a mandate to wear them in public places, and they take them off while they are sitting outdoors eating. Most people are doing the best they can.

In California, Gov. Gavin Newsom, a Democrat, said people should still wear masks in public spaces for now, but likely not after June 15 when the state fully reopens. “Only in those massively large settings where people around the world, not just around the country, are convening and where people are mixing in real dense spaces,” Newsom told KTTV.

“Otherwise we’ll make guidance, recommendations, but no mandates and no restrictions in businesses large and small.” Is that all crystal clear? I’ll leave that for you to decide.





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