Dow Jones Historical Quotes

Chris Krueger, long-time Capitol Hill watcher for Guggenheim Securities, says the people expecting this kind of kumbaya moment are “Pollyannas”. He said: “My reading of the White House is that they already feel pretty good about their legacy, having done what no administration since Harry Truman has done and extended access to healthcare.” These are the facts on the ground, which bode ill for investors, but there is a conundrum: history suggests we are at a point in the political cycle when markets usually do well. After some volatility around the midterms, the stock market has historically settled into a very strong year in the third year of the presidential cycle, according to an analysis by Jeff Hirsch, editor of the Stock Trader’s Almanac. Sweeping in 180 years of data on the Dow Jones Industrial Average and predecessor indices, he calculates the average Year 3 gain to be 10.4 per cent, almost double the next best year, the presidential election year itself.

In response to current events, people often reach for historical analogies, and this occasion was no exception. The trick is to choose the right analogy. In August 2007, the analogies that came to mind—both inside and outside the Fed—were October 1987, when the Dow Jones industrial average had plummeted nearly 23 percent in a single day, and August 1998, when the Dow had fallen 11.5 percent over three days after Russia defaulted on its foreign debts. With help from the Fed, markets had rebounded each time with little evident damage to the economy. Not everyone viewed these interventions as successful, though. In fact, some viewed the Fed’s actions in the fall of 1998—three quarter-point reductions in the federal funds rate—as an overreaction that helped fuel the growing dot-com bubble. Others derided what they perceived to be a tendency of the Fed to respond too strongly to price declines in stocks and other financial assets, which they dubbed the “Greenspan put.” (A put is an options contract that protects the buyer against loss if the price of a stock or other security declines.) Newspaper opinion columns in August 2007 were rife with speculation that Helicopter Ben would provide a similar put soon. In arguing against Fed intervention, many commentators asserted that investors had grown complacent and needed to be taught a lesson. The cure to the current mess, this line of thinking went, was a repricing of risk, meaning a painful reduction in asset prices—from stocks to bonds to mortgage-linked securities. “Credit panics are never pretty, but their virtue is that they restore some fear and humility to the marketplace,” the Wall Street Journal had editorialized, in arguing for no rate cut at the August 7 FOMC meeting.

Then came Black Monday, October 19, 1987, when the bottom simply fell out. A record-cracking 600 million shares were traded on the Big Board that day, as the Dow Jones Industrial Average plummeted 508 points—a 22.6 percent fall, more than twice the damage inflicted on the worst day of the historic 1929 crash. The S&P 500 dropped almost as far, just as fast.