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What qualifies as a stock market ‘plunge’?

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Kenneth W. Rudzinski

I recently heard a financial reporter refer to a 100-point drop in the Dow Jones Industrial Average as “a 100-point plunge,” which made me laugh.

But then I thought, “What if the average investors were thinking the same thing, especially those older clients who were invested in the markets when 100 points was indeed a ‘plummet’ or plunge?” So, I decided to make some 2018 sense out of effect of market point movement to better put those into perspective.

To do that, and as a reference comparison, I think we should recall the facts of the October 1987 stock market crash, often referred to as “Black Monday.” That was a day when the markets really did plunge/plummet. It was a day when the buyers disappeared and the sellers finally stampeded out the door in what is often referred to as “capitulation,” when downside stop-loss protection became useless.

The facts are these:

1. On Monday, Oct. 19, 1987, the Dow Jones Industry Average (DJIA) fell 508 points to 1,738.74, or a drop of 22.61%.

2. But prior to that, on Oct. 14, the DJIA dropped 95.46 points, or 3.8%; on Oct. 15 it fell 58 points, or 2.4%; and on the Friday, Oct. 16, before Black Monday, the DJIA retreated 108 points, or 4.6%, to close at 2,246.74. So, the total pre-crash decline was 261.46 points, or about 10.8%.

3. The DJIA peaked on Aug. 25 at 2,722. This was +44% over the Dec. 31, 1986, close of 1,895.

4. Despite the October plunge, the DJIA actually finished +2.26% for the whole year of 1987.

I specifically remember the real doom and gloom over that weekend prior to Oct. 19 and the fearful expectations for what was to come on Monday. The DJIA had half of a crash before the actual crash, so naturally pessimism ran rampant as the weekend clock ticked inevitably toward Black Monday. The rest is history.

Now, let’s try to put all that in perspective so we can accurately and factually comprehend in today’s terms what it means to have different levels of market (DJIA) declines at today’s levels. For example:

1. The Black Monday 1987 drop of 508 points would represent merely a 1.88% decline today at a DJIA level of 26,000.

2. A plunge/plummet of 100 points today at 26,000 would represent a “whopping” 0.37% decline, hardly deserving a headline, unless you are a financial reporter who thinks in 1987 terms.

3. On the contrary, the 22.61% drop in the DJIA on Black Monday would equate to a 5,879 drop in the DJIA today at 26,000.

The accompanying striking table shows the percentage gain needed to add 1,000 points to the DJIA as we progress in 1,000 increments from 25,000 to 30,000. It is startling how small the percentage increase is that’s needed to accomplish this. The table also shows what the 508-point drop in the DJIA on Black Monday would amount to at these same levels and, lastly, how small a percentage a 100-point drop would be at those same levels.

Why does this even matter? Average investors, for the most part, relate to the ups and downs of the DJIA. So, in 2018, when they see on their iPhones during the day or hear on their radio when they’re driving home that the DJIA dropped 500 points, many are still subject to old-think that a 500-point drop is a major event. In relative terms it is not, since at a DJIA 26,000 level, a 500-point drop is merely a 1.88% decline (remember a decline only becomes a loss if an investor sells).

It is fundamentally important to realize that as the markets progress upwards it takes a smaller percentage to reach the next 1,000-point level, and, to the contrary, a 1,000 drop at those exalted levels represents a smaller and smaller decline, a far cry from the Black Monday Crash of Oct. 19, 1987.

So, let the uniformed media speak of plummeting and plunging markets from a 100-point DJIA decline; we should all now know better.

For more information:

Kenneth W. Rudzinski, CFP, CLU, ChFC, CRPC, CASL, CAP, is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and a registered investment advisor. Member SIPC. Insurance offered through Lincoln affiliates and other fine companies and state variations thereof. Lincoln Financial Advisors does not provide tax or legal advice. Heritage Financial Consultants is not an affiliate of Lincoln Financial Advisors. CRN-1930589-102417. Rudzinski can be reached at Kenneth.Rudzinski@LFG.com.