How world markets react when the Dow dives

Investing


Any investor old enough to remember the notorious Dow decline of 508 points on Black Monday — Oct. 19, 1987 — is probably old enough to recall The Golden Girls, name all four Beatles and know that a plummeting Dow Jones Industrial Average spares no world markets when it falls into a rapid, ruinous spiral.

That 508-point nosedive in the Dow then represented more than 20 percent of the U.S. stock market index, and the selling ricocheted around the world in a classic investor panic. The exact anniversary date passed last Thursday, but Monday would be a weekly point of comparison, and one thing is for sure: A daily Dow dive of some magnitude has to return at some point. The last time the Dow closed down more than 300 points was on May 17 of this year, amid Trump headlines related to the firing of former FBI director James Comey. The last time the Dow closed down more than 500 points was in June 2016 after the surprise Brexit vote.

There is no sign that the Dow is headed for a cliff anytime soon — in fact, it ended the week with a 160-point gain on the tailwind of better prospects for tax reform legislation, and big investors remain bullish on U.S. stocks. But investor psychology guarantees that days of panic will happen again.

A drop of that size in points would now represent much less of the Dow, but if the bears are right, investors can take comfort in the fact that big Dow drops are not uncommon. There’s a long history to review to be better prepared — 80 drops of at least 300 points since 1987. And one thing is clear: There will be no safety in overseas stock markets. In fact, overseas stocks will stay down for longer and lose more than the Dow itself, according to data from Kensho, a hedge fund analytics tool that CNBC used to study times the Dow has dropped at least 300 points or 500 points in a single day over the past three decades.



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