The Dow Jones Industrial Average plunged a shocking 508 points— or about 22.6% — back on October 19, 1987.
But as scary as that drop was, US economic growth was resilient and GDP growth never went negative.
If you’re thinking about the 1987 crash in the context of the big picture, this is the one thing to remember.
It’s also relevant given the current volatile stock market in China.
“Similarly, [UBS China Economist] Tao Wang sees limited economic fallout from China’s equity market plunge given that stocks represent only around 12% of Chinese household financial wealth and there is scant prior evidence of a substantive correlation between consumption and stock prices,” UBS’ Julian Emanuel said in a recent note to clients.
“Taking a page from former Fed Chairman Alan Greenspan’s playbook — where Fed easing was an immediate response to 1987’s stock market dislocation … the Chinese authorities have undertaken a slew of support measures in the expectation that, like the US in 1987, economic activity might continue apace,” he added.
On top of that, analysts have previously suggested that economic recession caused by stock market crashes typically lead to less severe recessions than something like, for example, a housing crash or a credit crisis.
Most notably, Lombard Street Research’s Dario Perkins compared the effect on GDP from both the dotcom crash and the subprime-mortgage crisis, showing that GDP continued to rise during the former as it didn’t affect housing prices.
Stock market crashes are scary and come with pain. But there are scarier things out there if you’re thinking about risks to the economy.
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