Lessons from Black Monday

It’s been 35 years since the epic Black Monday crash. What have investors learned? The market has since recovered to its pre-crash strength.

Over the last month, we’ve heard a lot of debate about the stock market and the economy. The debate has largely centered on whether the economy got a boost from the huge $1.4 trillion tax cut passed by Congress and signed by President Trump on Dec. 22, 2017.

Our panel of experts weighed in on this issue, as well as the impact of the recent stock market gains on consumer spending, as well as whether interest rates are low and the Fed’s policy stance is appropriate.

But, it’s also been 35 years since the biggest stock market crash since 1931. So, what can we learn from it?

Let’s start with the tax cut, which the experts agreed was good news for the economy. It helped stimulate the economy and led the Fed to raise rates on Dec. 16. But, it was followed by a sell-off and the Dow tumbling from its highs the day before Christmas, on Black Monday.

The Dow Jones Industrial Average closed at 25,981 on New Year’s Day, down almost 6,800 points from its peak. That’s still a far bigger decline than the S&P 500, which dropped an additional 2,400 points from its high in October.

As the experts discussed, it’s clear that Black Monday was not a one-off event in the history of the stock market. It actually happened at least once a decade. But, we still learn many lessons from Black Monday. Here are some of the biggest lessons.

1. The stock market has a way of correcting itself

No, the stock market didn’t crash because it was being overvalued. It was because it was being too heavily valued.

During the dot-com bubble, the stock market was overvalued by about 1,000 percent. And, that was during a period when the market was in a bull market. When the market was being overvalued for six years in a row in the 2000s, it corrected itself by nearly 1,000 percent.

That was an important lesson that we learned in 2009 when the market fell by another 1,000 percent. But, we also knew that stocks were overvalued in 1929. That happened during a

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