CNBC’s Jim Cramer said he thinks investors not only need to know what to do in case of a market crash or enormous sell-off, but why the crisis might be occurring.
Over the course of Cramer’s decades-long career, he said he’s seen only two “truly horrifying” sell-offs: the crash of 1987 and the rolling crash of 2007 to 2009 during the financial crisis. To Cramer, the crash during the Covid-19 pandemic doesn’t compare to either of these because the market rebounded immediately.
But Cramer noted a difference between the two, saying the crash in 1987 wasn’t caused by an overarching failure of the economy.
“Sometimes crashes have nothing to do with the economy,” Cramer said. “They’re caused by the mechanics of the market.”
He recounted 1987’s “Black Monday” and “Terrible Tuesday,” where the Dow lost more than 22% of its value in a single session. Yet, there was a rally over the next few days, Cramer said, due to Alan Greenspan, the Federal Reserve chair at the time, who managed to raise enough liquidity from the central bank to stabilize the market. But during the financial crisis, the market took years to recover, not bottoming until 2009 after the Dow initially plunged in 2007.
Cramer said the crash in 1987 resembles the “flash crashes” of 2010 and 2015. These crashes, Cramer said, were caused by futures, or financial contracts that allow investors to speculate on the price of a financial instrument or commodity.
“Black Monday happened because stock traders didn’t understand the power of the futures market back then, which could flood the stock market with instant unseen supply, and no one was ready for it.” Cramer said. “These days, we accept that the futures are worth watching, but it wasn’t like that back then, because they were relatively new instruments, created about five years before the crash, and no one knew the power they had.”
