August 17th - This Day in Stock Market History

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Quote of the Day

“…long term thinking is a luxury not always available to the highly leveraged; they may not survive that long.”
-Roger Lowenstein, from his book, When Genius Failed: The Rise and Fall of Long Term Capital Management.

This day in history marks an event that would be one of the primary reasons for LTCM’s collapse.

August 17th – This Day in Stock Market History

August 17, 1982 – Markets Takeoff From 1982 Bear Market Low

On Tuesday, August 17, 1982, the DJIA rose a then-record 38.81 points to close at 831.24, a 4.9% gain.

The catalyst was a memo from Salomon Brothers’ Henry Kaufman, nicknamed “Dr. Doom”, who had been Wall Street’s most influential rate bear. Kaufman’s memo predicted that “long-term U.S. government bonds now yielding about 12 percent may well fall into the 9 percent to 10 percent range sometime within the next 12 months.”

The Washington Post captured it:

“The stock market yesterday recorded the largest one-day jump in its history, amid signs that the high interest rates that have plagued the economy finally may be heading down. The Dow Jones Industrial Average soared a record 38.81 points… At day’s end, the Dow stood at 831.24.” In his memoir The Day the Markets Roared (2021), Kaufman writes that the memo “set the global markets on fire, marking the start of almost four decades of US economic growth.”

This came just days after the bottom of the 1966-1982 bear market on August 12, 1982.

The very next session, August 18, 1982, produced the first 100-million-share day in NYSE history (132.7 million shares).

By October 11, 1982, the Dow closed above 1,000 for the first time (1,012.79), and it ended the year at 1,046.54, up 19.6%.

August 17th, 1987 – The Dow Jones Industrial Average closes above 2,700 for the first time.

The milestone came just 1 week after the Dow eclipsed the 2,600 barrier for the first time. It would be the fastest 100 point climb in the Dow’s history.

The market was on a tear in 1987 though August, and was up more than 40% YTD on this day in 1987.

But it would not last much longer.

On August 26th, 1987 the Dow would close at 2,722.42, which would be its high before “Black Monday – October 19th, 1987“. It would take the market until August 24th, 1989 to set a new all time high.

August 17th, 1998 – Russia effectively defaults on its foreign debt as it declares a “debt moratorium”.

U.S. stock markets do not panic initially, but by Friday August 21st worldwide stock markets plunge, as the Dow falls 280 points (about 3%) intra-day, the stock market in Caracas fell 9.5%, Brazil fell 6% and Germany fell 2%.

The panic caused by Russia was hurting one hedge fund in particular – Long Term Capital Management, who had $3.6 billion in assets leveraged at 25 to 1, much of which was used to bet heavily on Russian bonds. Within 5 weeks of Russia’s default, all equity of the fund would be lost.

Source: When Genius Failed

Front page article on the ongoing Russian crisis from the New York Times August 18, 1998 issue

Read of the Day

Warren Buffett talked about the fall of Long Term Capital Management in his 2002 letter to shareholders:

“Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, long-term capital management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later congressional testimony, Fed officials acknowledged that, had they not intervened, that outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM and Domino toppled. And this affair, though it paralyzed many parts of the fixed income market for weeks, was far from a worst-case scenario.

One of the derivatives instruments that LTCM used was total return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, party a to a contract, usually a bank, puts up all the money for the purchase of the stock will party be, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.”