Showing posts with label October 1987 Crash. Show all posts
Showing posts with label October 1987 Crash. Show all posts

Wednesday 10 April 2013

A Look Back at Black Monday 1987

After the Crash - Wall Street Week Oct. 23, 1987

The Wall Street Week episode from Friday October 23, 1987 just after the market crash on black Monday October 19. Hosted by Louis Rukeyser, guests included John Templeton, Steven Einhorn and William Schreyer.

Part 2 - Excellent advice from John Templeton.





Reliving the Crash of 87

The Nightly Business Report episode from Black Monday, October 19, 1987. The Dow Jones Average dropped by more than 22% that day to close at 1,738 with volume double the previous record (set the preceding Friday). Just two months earlier the average had peaked at 2,722, a level it would not see again for two years and would revisit for the final time in early 1991.





Saturday 3 December 2011

Lessons from the '87 Crash

SPECIAL REPORT October 11, 2007

Lessons from the '87 Crash

Enjoying the Dow's record run? Don't get too comfy. The market's Black Monday breakdown is a reminder of how quickly investor sentiment can turn

by Ben Steverman

As major stock indexes hit all-time highs, it's worth looking back 20 years to a far gloomier time, when investors were cruelly and suddenly reminded that the value of their investments can depend on something as unpredictable as a mood swing.

Every once in a while, fear, snowballing into panic, sweeps financial markets—the stock market crash of October, 1987, now celebrating its 20th birthday, is a prime example.

In the five trading sessions from Oct. 13 to Oct. 19, 1987, the Dow Jones industrial average lost a third of its value and about $1 trillion of U.S. stock market value was wiped out. The losses culminated in a panic-stricken 22.6% decline in the Dow on Black Monday, Oct. 19. The traumatic drop raised recession fears and had some preparing for another Great Depression.

Stock market crashes were nothing new in 1987, but previous financial crises—in 1929, for example—often reflected fundamental problems in the U.S. economy.

MYSTERIOUS MELTDOWN
The market's nervous breakdown in 1987 is much harder to explain. Especially in light of what came next: After a couple months of gyrations, the markets started bouncing back. The broad Standard & Poor's 500-stock index ended 1987 with a modest 2.59% gain. And in less than two years, stocks had returned to their pre-crash, summer of 1987 heights.

More importantly for most Americans, the U.S. economy kept humming along. Corporate profits barely flinched.

To this day, no one really knows for sure why the markets chose Oct. 19 to crash. Finance Professor Paolo Pasquariello of the University of Michigan's Ross School of Business says the mystery behind 1987 prompted scholars to come up with new ways of studying financial crises. Instead of just focusing on economic fundamentals, they put more attention on the "market microstructure," the ways people trade and the process by which the market forms asset prices.

True, in hindsight there are plenty of adequate reasons for the '87 crash. Stocks had soared through much of 1987, hitting perhaps unsustainable levels: In historical terms, stock prices were way ahead of corporate profits. New trading technology and unproven investing strategies put strain on the market. There were worries about the economic impact of tensions in the Persian Gulf and bills being considered in Congress.

OUT OF SORTS
But for whatever reason, the mood on Wall Street shifted suddenly, and everyone tried to sell stocks at once. "Something just clicked," says Chris Lamoureux, finance professor at the University of Arizona. "It would be like a whole crowded theater trying to get out of one exit door."

It's a fairly common phenomenon on financial markets. Every stock transaction needs a buyer or a seller. When news or a mood shift causes a shortage of either buyers or sellers in the market, stock prices can surge or plunge quickly. Most of the time, balance is quickly restored. Lower prices draw in new buyers looking for a bargain, for example.

Sometimes, as in 1987 and many other true crises, things get out of hand. What happens at these moments is a mystery that may be best explained by dynamics deep within human nature.

Usually, explains behavioral finance expert Hersh Shefrin, a professor at Santa Clara University, investors believe they understand the world. In a crisis, "something dramatically different happens and we lose our confidence," Shefrin says. "Panic is basically a loss of self-control. Fear takes over."

BUYERS AND SELLERS
Why don't smart investors, seeing others panic and sell stocks, step in to buy them up at a bargain?

First, it's very hard, in the midst of a crisis, to tell whether markets are acting rationally or irrationally. Buyers refused to enter credit markets this summer on fears about risky mortgage debt. It will take months, maybe years, to add up the full impact of losses on subprime loans.

It's also tough to think rationally yourself. "It's hard to keep your emotions in check when your money is on the line," Shefrin says.

And, even if you're confident the panicked market is giving you a buying opportunity, you're likely to want to wait until it hits bottom. If a market is in free fall, buying stocks on the way down is likely to give you instant losses.

Not only will buyers hold back. A falling market will bring many more sellers out of the woodwork. Leverage is one reason: Many investors buy stocks on borrowed money, so they can't afford to lose as much without facing bankruptcy.

This is one explanation for the temporary, sharp drops in many financial markets in the summer of 2007. Losses on leveraged mortgage debt prompted many hedge funds to dump all sorts of assets to raise cash.

THERAPY FOR A PANICKED MARKET
The solution to a panicked market, many say, is slowing down the herd of frightened investors all running in the same direction. New stock market rules instituted since 1987 pause trading after big losses. For example, U.S. securities markets institute trading halts when stock losses reach 10% in any trading session. "If you give people enough time, maybe they will figure out nothing fundamental is going on," University of Michigan's Pasquariello says.

There's another form of therapy for overly emotional markets: information. In 1929 and during other early financial crises, there were no computer systems, economic data were scarce, and corporate financial reporting was suspect. "The only thing people knew in the 1920s was there was a panic and everybody was selling," says Reena Aggarwal, finance professor at Georgetown University. "There was far less information available." In 1987, and even more today, investors had places to get more solid data on the market and the economy, giving them more courage not to follow the herd. That's one reason markets found it so easy to shrug off the effects of 1987, Aggarwal adds.

You can slow markets down, reform trading rules, and tap into extra information, but financial panics may never go away. It seems to be part of our collective human nature to occasionally reassess a situation, panic, and then all act at once.

Many see the markets as a precarious balance between fear and greed. Or, alternatively, irrational exuberance and unwarranted pessimism. "All you need is a shift in mass that's just big enough to push you toward the tipping point," Shefrin says.

IN FOR THE LONG HAUL
What should an individual investor do in the event of a financial crisis? If you're really sure that something fundamental has changed and the economy is heading toward recession or even another depression, it's probably in your interest to sell. But most experts advise waiting and doing nothing. "In volatile times, it is very likely that you [will be] the goat that other people are taking advantage of," University of Arizona's Lamoureux says. "It's often a very dangerous time to be trading."

Shefrin adds: "The chances of you doing the right thing are low." Don't think short-term, he says, and remind yourself of the long-term averages. For example, in any given year, stock markets have a two in three chance of moving higher. Other than that, it's nearly impossible to predict the future.

So, another financial panic may be inevitable. But relax: There's probably nothing you can do about it anyway. Anything you do might make your situation worse. So the best advice may be to send flowers to your stressed-out stockbroker, stick with your long-term investment strategy, and sit back and watch the market's roller-coaster ride.

Steverman is a reporter for BusinessWeek's Investing channel .

http://www.businessweek.com/investing/content/oct2007/pi20071011_494930.htm

Tuesday 15 February 2011

If stock markets or stocks crash, WHO will benefit the most?

Those who bought during bubbles become paupers during crashes.

Those who bought during crashes become millionaires when the market reverses.

Wealth is destroyed by bubbles and created from crashes.

Your potential returns are a function of price you paid for the stocks offered by the market.

Those who will be investing for a long time will like the stock market when it is on CHEAP SALE.

Those who need to cash out significantly for various reasons during crashes will be the losers.

Sunday 9 May 2010

The FAT FINGER Incident. Why the market crashed on 6th May 2010?

So what happened? Details were still fuzzy last night as of this writing, but it looks like the event will become known as the fat finger event. A trader at Citi entered an order to sell 15 million shares of a security (not an outrageous amount), but accidental typed billion. Traders all over the globe saw the huge sell order and followed suit assuming Citi knew something. A massive selloff ensued. Part of the issue is because a lot of sophisticated traders use stop-loss order to limit themselves from losing too much in a massive selloff. Say I owned stock in Google and wanted to protect myself from losing too much money if the stock lost value. Earlier this week Google was trading around $530. So maybe I decided if the price dropped to $500 I’d sell my position. When the massive selloff occurred Google dropped to $500 so my stop loss order was triggered. All over the world millions of stop-loss orders like this were triggered so the market was flooded with sell orders and the price of everything tanked. Though it was fantasy trading, I had quite a few stop loss orders triggered as well.

In the high paced world of trading, with lightning fast computers, and herd mentalities, in a matter of minutes almost 10% of the value of the US stock market was wiped out. This 2.5 minute video shows how quickly it happened, and makes Jim Cramer look like the savior of the market. He literally calls the selloff ridiculous, and then people just started buying.
















The FAT FINGER Incident

Friday 7 May 2010

Panic sends Dow to worst ever drop




Panic sends Dow to worst ever drop
MARINE LAOUCHEZ
May 7, 2010 - 8:49AM
AFP

Panic selling swept US markets on Thursday as the Dow Jones plunged a record of almost 1000 points before recouping more than half those losses.

It was unclear whether the sudden sell-off, the Dow's biggest ever intra-day drop, was the result of fears over the Greek debt crisis, a mistaken trade or technical error.

The crash began shortly before 2.25pm local time, when in a white-knuckle 20 minutes America's top 30 firms saw their share prices dive 998.5 points, almost nine per cent, wiping out billions in market value.

The drop eclipsed even the crashes seen when markets reopened after September 11, 2001 and in the wake of the Lehman Brothers collapse.

The Dow later recovered, closing nearly four per cent down, but spooked traders were left wondering whether a technical glitch had caused the blue-chip index to erode three months of solid gains.

Rumours swirled that a Citigroup trader had mistakenly sold 16 billion rather than 16 million stocks in Procter and Gamble shares, forcing the Dow down.

Shares in the consumer goods giant lost more than seven US dollars, falling in a similar pattern to the Dow, trading at a low of 55 US dollars a share.

"At this point, we have no evidence that Citi was involved in any erroneous transaction," said company spokesman Stephen Cohen.

A spokesperson for the New York Stock Exchange said the cause was still not known.

"We don't know, right now we're looking into it," said Christian Braakman, "it's all speculation."

But after three days in which stocks have suffered triple-digit intra-day losses because of concern about Greece's debt crisis, it was clear that the sell-off was real for some investors.

At the close, the Dow had recovered to 10,520.32, down 347.80 (3.20 per cent), while the Nasdaq was down 82.65 points (3.44 per cent) at 2,319.64. The Standard & Poors 500 Index was down 37.72 points (3.24 per cent) to 1,128.15.

Images of rioting as the Greek parliament passed unpopular austerity measures did little to ease market panic.

The parliament approved billions of euros of spending cuts pledged in exchange for a 110 billion euros ($A155 billion) EU-IMF bailout just one day after three bank workers died in a firebomb attack during a huge protest.

On Thursday, police charged to scatter hundreds of youths at the tail-end of a new protest outside parliament that drew more than 10,000 people.

In Lisbon, European Central Bank chief Jean-Claude Trichet battled to reassure financial markets that Greece's debt crisis would not end in default, but could not prevent the euro from falling to a 14-month low against the dollar.

Pleas for patience from the White House also had little impact.

The White House said that reforms in Greece were "important" but would take time and that the US Treasury was monitoring the situation.

"The president has heard regularly from his economic team," said White House spokesman Robert Gibbs, adding that President Barack Obama's top economic officials were closely communicating with their European counterparts.

© 2010 AFP

http://news.smh.com.au/breaking-news-business/panic-sends-dow-to-worst-ever-drop-20100507-uhgu.html

US stocks plummet, then recover some losses

US stocks plummet, then recover some losses
May 7, 2010 - 6:56AM

US stocks plunged 9 per cent in the last two hours of trading overnight before clawing back some of the losses as the escalating debt crisis in Europe stoked fears a new credit crunch was in the making.

The Dow suffered its biggest ever intraday point drop, which may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said.

Indexes recovered some of their losses heading into the close but equities had erased much of their gains for the year to end down just over 3 percent, the biggest fall since April 2009.

"We did not know what a stock was worth today, and that is a serious problem," said Joe Saluzzi of Themis Trading in New Jersey.

Traders around the world were shaken from their beds and told to start trading amid the plunge as investors sought to stem losses in the rapid market sell-off.

Declining stocks outnumbered advancers on the New York Stock Exchange by more than 17 to 1. Volume soared to it highest level this year by far.

Nasdaq said it was investigating potentially erroneous transactions involving multiple securities executed between 2.40pm and 3pm New York time.

Investors had been on edge throughout the trading day after the European Central Bank did not discuss the outright purchase of European sovereign debt as some had hoped they would to calm markets, but gave verbal support instead to Greece's savings plan, disappointing some investors.

The Dow Jones industrial average dropped 347.80 points, or 3.20 per cent, to 10,520.32. The Standard & Poor's 500 Index fell 37.75 points, or 3.24 per cent, to 1128.15. The Nasdaq Composite Index lost 82.65 points, or 3.44 per cent, to 2319.64.

The sell-off was broad and deep with all 10 of the S&P 500 sectors falling 2 to 4 per cent. The financial sector was the worst hit with a fall of 4.1 per cent.

Selling hit some big cap stocks. Bank of America was the biggest percentage loser on the Dow, falling 7.1 per cent to $US16.28. All 30 component of the Dow closed lower.

An index known as Wall Street's fear gauge, the CBOE Volatility Index closed up more than 30 per cent at its highest close since May 2009. It had earlier risen as much as 50 per cent.

The mounting fears about a spreading debt crisis in Europe curbed the appetite for risk and put a report of weak US retail sales into sharper relief. Most top retail chains reported worse-than-expected same-store sales for April, sparking concerns about consumer spending, the main engine of the US economy.

That hit shares including warehouse club Costco Wholesale Corp, which fell 3.9 per cent to $US58.03, and apparel maker Gap Inc, which lost 7.2 per cent at $US22.91.

The head of the ECB, Jean-Claude Trichet, said on Thursday that Spain and Portugal were not in the same boat as Greece, but the risk premium that investors demand to hold Portuguese and Spanish government bonds flared to record highs.

Reuters


http://www.smh.com.au/business/markets/us-stocks-plummet-then-recover-some-losses-20100507-uh8l.html

'Fat finger' trade forces US stocks dive

'Fat finger' trade forces US stocks dive
May 7, 2010 - 6:30AM

The biggest intraday point drop ever for the Dow Jones Industrial Average may have been caused by an erroneous trade entered by a person at a big Wall Street bank that in turn triggered widespread panic-selling.

At one stage, the Dow was down a whopping 998 points - or 9 per cent - before rebounding but it was still sharply lower for the session as continuing worries about Greece and the so-called sovereign debt contagion ate into investor confidence.

The so-called "fat finger" trade apparently involved an exchange-traded fund that holds shares of some of the biggest and most widely traded stocks, sources said. The trade apparently was put in on the Nasdaq Stock Market, sources said.

But US stocks still ended sharply lower, as continuing worries about the debt crisis in Greece ate into market confidence, prompting a wide-spread sell-off.

US stocks posted their largest percentage drop since April 2009, with all three major indexes ending down more than 3 per cent.

Indexes earlier in the afternoon had plunged even more steeply, before paring losses.

Observers questioned why Procter & Gamble’s stock tumbled precipitously - and some say that could have been behind the massive plunge.

Both Fox News and CNBC reported that a trading error involving P&G stock could have been responsible for part of a dip that dragged the Dow Jones Industrial Average within a hair’s breadth of a 1000-point drop.

The sudden sell-off saw investors desert stocks wholesale.

But P&G’s stock, which had been trading at $US62, suddenly began to crash, falling around 20 per cent at one point for no apparent reason.

The Dow Jones industrial average ended down 347.80 points, or 3.2 per cent, at 10,520.32. The Standard & Poor's 500 Index was off 37.75 points, or 3.24 per cent, at 1128.15. The Nasdaq Composite Index was down 82.65 points, or 3.44 per cent, at 2319.64.

Several sources said the speculation is that the trade was entered by someone at Citigroup. A Citigroup spokesman said it was investigating the rumour but that the bank currently had no evidence that an erroneous trade had been made.

http://www.smh.com.au/business/markets/fat-finger-trade-forces-us-stocks-dive-20100507-uh91.html

Monday 19 October 2009

Discovering if we learnt the lessons of Black Monday, October 1987 Crash

From The Times October 19, 2009

Discovering if we learnt the lessons of Black Monday

Gerard Lyons: Economic view

Today is the twenty-second anniversary of Black Monday. On this day in 1987 stock markets around the world crashed. The Dow Jones fell 22.6 per cent in one day, London shed one fifth of its value over two days. The newspapers and television were full of pictures of traders in panic. Sound familiar?

Reflecting on 1987 is interesting in its own right and has lessons for today. Many of the factors that led to the 1987 crash are now being repeated around the globe: equity markets seen as out of touch with reality; concern about the twin US trade and budget deficits; and worries about the dollar.

Poor US trade figures on the preceding Thursday had spooked the markets, which had been worried already by a small interest rate hike by the Germans the week before.

That rise had triggered worries that global policy co-ordination was at an end. The period from September 1985 to the summer of 1987 was the golden era of policy co-ordination, with the Plaza and Louvre accords marking a time when the G7 acted together to first weaken and then stabilise the dollar. By October 1987, co-ordination was at an end.

The crash led to fears of a depression and prompted central banks to pump liquidity into the markets and to cut interest rates. The Bank of England base rate was 10 per cent on Black Monday and reached a low of 7.5 per cent the following May. At the time, I wrote in The Times of the problems to come. A year later, in October 1989, base rate was up to 15 per cent. Boom then became bust.

Today’s crisis has been worse, as the financial system almost collapsed, jobs have been lost, firms have gone bust. As a result, the policy response has been more aggressive. But, as in 1987, perhaps the stimulus may work better and quicker than initially expected.

If anything, Black Monday was a watered-down version of what we have experienced now and an early warning sign of the underlying volatility of markets. Then, there was talk of pro-cyclicality on the way up and down, triggered by programmed trading systems.

Also, I remember a speech by Robin Leigh-Pemberton, the Bank of England Governor, in February 1988 in which he placed the blame on regulation and supervision and said: “This will have implications for the capital resources that participants must be required to maintain.” Banks, we were then told, must learn the lessons about credit exposure and capital adequacy. How times change? Not much it would seem.

These issues were still centre stage ten days ago at the International Monetary Fund (IMF) meetings in Istanbul, where the mood was one of optimistic caution. Relief that policy had pulled us back from the brink was mixed with fears of over-regulation and concerns that we may be sowing the seeds of the next crisis.

The global outlook depends on the interaction between three key factors: the economic fundamentals; the policy response; and confidence. In Istanbul, the outlook for policy was at centre stage.

Central banks and policymakers in the West appear to be keen to co-ordinate their exit strategies from their stimulus. This is something they plan to discuss at next spring’s IMF meetings in Washington. Yet the next six months might test this accord to the full. There is every likelihood of a strong bounce over that time, as previous policy easing feeds through.

Just as we saw with the Bundesbank rate rise in early October 1987, coming months may force many countries to think about tightening policy to suit domestic needs. This great dilemma is already being played out across the world.

In recent weeks Israel and Australia have raised rates. The further east one goes, the greater the temptation to tighten policy. Indonesia and India have already hinted at higher rates, South Korea is in two minds, while behind the scenes in China policymakers appear to be at odds. There, the worries of the Premier and State Council over exports and jobs may take precedence over central bank concerns about asset price inflation.

The dilemma for many countries is that tightening early may attract hot money inflows, as investors seek higher yields. Waiting, however, may trigger asset price inflation, with liquidity flowing into equities and property, as we have seen recently in China. The question is: can any large exporting nation really tighten monetary policy before the United States, or indeed Europe, given that these are the destinations of the bulk of goods and services?

In view of such uncertainty, many countries appear keen to build up their defences, to be prepared for any eventuality. The lesson of Asia over the past decade has not been lost. After its crisis in 1997-98, Asia’s holding of global currency reserves rose from one third to two thirds now, the bulk in dollars. Others look set to follow suit.

It is not in anyone’s interests to actively sell the dollar, in case this triggers the collapse they fear. Thus, what I call passive diversification is taking place. As reserves rise, less and less are going into the dollar, although it still receives the lion’s share.

Over time, more countries will want to manage their currency against the countries with which they trade. If foreign exchange reserves were to reflect trade patterns, then $2.3 trillion of the present $6.8 trillion of global foreign exchange reserves would have to move out of the dollar. The private sector is already cautious.

As the dollar declines, the gainers are commodity currencies, gold, the euro and the yen.

Not everyone is happy. This dampens recovery prospects in countries whose currencies are appreciating and adds to problems for the most fragile economies in the eurozone. It is also adding to pressure on Asian countries, particularly China, to let their currencies strengthen. Perhaps this merits a repeat of the 1985 Plaza Accord to prevent an inevitable currency crisis.

Yet one currency that seems unlikely to rally against the dollar is sterling. In part, this is because of market caution towards the UK. It is also because a weaker pound is seen as central to Britain’s policy stance. This is alongside the need for a prolonged period of low interest rates and a much tighter fiscal stance.

The UK has had the biggest devaluation in its history. Yet there have been few squeals, as it has been gradual and is taking place in an environment where competition is tough and inflation is not a problem. As history has shown us, sterling remained the world’s reserve currency long after the UK’s economic power had peaked.

This is relevant in considering the dollar’s prospects now. The general feeling in Istanbul was that there are no alternatives to the dollar. Perhaps that is right, but the dollar and sterling face hard times ahead. If there is one thing this crisis and that of Black Monday have taught us, it is not to ignore the fundamentals.

• Gerard Lyons is chief economist at Standard Chartered

http://business.timesonline.co.uk/tol/business/columnists/article6880225.ece

Thursday 11 June 2009

An important lesson from the October 1987 crash

A comparison of the DJIA from 1922 - 1929 and 1980 - 1987 showed an uncanny similarity between these two bull markets. On October 19, 1987, we witnesse d the greatest 1-day drop in the stock market history, exceeding the great crash of October 29, 1929. In fact, the market in 1987 continued to trade like 1929 for the remainder of the year. Many forecasters, citing the similarities between the two periods, were certain that disaster loomed and advised their clients to sell everything.

However, the similarity between 1929 and 1987 ended at year's end. The stock market recovered from its October 1987 crash and by August of 1989, hit new high ground. In contrast, 2 years after the October 1929 crash, the Dow, in the throes of the greatest bear market in U.S. history, had lost more than two-thirds of its value and was about to lose two-thirds more.

What was different? Why did the eerie similarities between these two events finally diverge so dramatically?

The simple answer is that in 1987 the central bank had the power to control the ultimate source of liquidity in the economy - the supply of money - and, in contrast to 1929, did not hesitate to use it. Heeding the painful lessons of the early 1930s, the Federal Reserve temporarily flooded the economy with money and pledged to stand by all bank deposits to ensure that all aspects of the financial system would function properly.

The public was reassured. There were no runs on banks, no contraction of the money supply, and no deflation in commodity and asset values. Indeed, the economy itself moved upwards despite the market collapse. The October 1987 stock market crash taught investors an important lesson - that a crisis can be an opportunity for profit, not a time to panic.

Monday 25 May 2009

Reap the benefits of market volatility

Reap the benefits of market volatility

When stocks are collapsing, worst-case scenarios loom large in investors' minds. On May 6, 1932, after stocks had plummeted 85% from their 1929 high, Dean Witter issued the following memo to its clients:

"There are only two premises which are tenable as to the future. Either we are going to have chaos or else recovery. The former theory is foolish. If chaos ensues, nothing will maintain value; neither bonds nor stocks nor bank deposits nor gold will remain valuable. Real estate will be a worthless asset because titles will be insecure. No policy can be based upon this impossible contingency. Policy must therfore be predicated upon the theory of recovery. The present is not the first depression; it may be the worst, but just as surely as conditions have righted themselves in the past and have gradually readjusted to normal, so this will again occur. The only uncertainty is WHEN it will occur.... I wish to say emphatically that in a few years present prices will appear as ridiculously low as 1929 values appear fantastically high."

Two months later the stock market hit its all time low and rallied strongly. In retrospect, these words reflected great wisdom and sound judgment about the temporary dislocations of stock prices. Yet, at the time they were uttered, investors were so disenchanted with stocks and so filled with doom and gloom that the message fell on deaf ears. Investors often overreact to short-term events and fail to take the long view of the market.

1987 Crash v.s. 1929 Crash

Despite the drama of the October 1987 market collapse, which often has been compared with 1929, there was amazingly little lasting effect on the world economy or even the financial markets. Because this stock market crash did not augur either a further collapse in stock prices or a decline in economic activity, it probably will never attain the notoriety of the crash of 1929. Yet its lesson is perhaps more important: Economic safeguards, such as prompt Federal Reserve action to provide liquidity to the economy and ensure the financial markets, can prevent an economic debacle of the kind that beset our economy during the Great Depression.

This does not mean that the markets are exempt from violent fluctuations. Since the future will always be uncertain, psychology and sentiment often dominate economic fundamentals. As Keynes perceptively stated 60 years ago in The General Theory, "The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made." Precarious estimates are subject to sudden change, and prices in free markets will always be volatile. But history has show that investors who are willing to step into the market when others are panicking to leave reap the benefits of market volatility.