The Day the Stock Market Disappeared

Could a secret “level 3” circuit breaker save the market?

It’s Happened Before, Will It Happen Again?

In October of 2016, US stock market capitalization stood at $23.8 trillion dollars, an 87% change since 2003. (1)

But what would happen if the stock market suddenly closed?

Panic would set in.

With markets closed, investors would run to the banks to withdraw their remaining money. Overwhelmed, banks would shut down too like they have before in these situations.

And then, like toppling dominos, the entire financial system could soon shut down.

Millions of investors could be looking at ruin, with their retirement funds inaccessible and perhaps lost forever.

Sound impossible? It’s not.

It’s happened before, and it may very well happen again. Nothing lasts forever, and all it takes is one major event to start the chain reaction.

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Take Europe, for example.

In 1914, World War I broke out. It started with a single assassination, but within a few days, Austria-Hungary, Germany, Russia, France, Belgium, and England were at war. (2)

All of Europe’s major exchanges closed immediately, as did many of the major exchanges outside of Europe. Even the New York Stock Exchange closed from July 30 to December 12 of 1914.

These exchanges had to close in order to stop massive cash outflows and plunging stock prices. Investors were unable to access their shares for months, except in risky over-the-counter markets.

Could it happen again? If history is any indication, it can.

In the United States alone, notable stock market crashes include:

The panics of 1873, 1884, 1893, 1896, 1901, and 1907,

The Depression of 1920-1921,

The Wall Street Crash of 1929,

Black Monday in 1987,

The Friday the 13th mini-crash of 1989,

The October 27 mini-crash of 1997,

The September 11attacks in 2001,

The bear market of 2007-2009,

And the 2015-2016 market selloff.

Some of these crashes resulted in market closures, but they were thankfully short-term.

As an additional safety measure following the Black Monday crash in 1987, the US Security and Exchange Commission implemented Rule 80B for the NYSE.

Rule 80B makes the markets safer by using circuit breakers, but perhaps it is a false sense of security.

This rule sets market circuit breakers of 7% (Level 1), 13% (Level 2) and 20% (Level 3). Level 1 and 2 declines result in 15-minute market trading halts, while a Level 3 decline results in market trading being suspended for the rest of the day. (The Chicago Mercantile Exchange (CME) has similar circuit breakers.)

But these circuit breakers only counter short-term volatility. What would happen if a major war, terrorism attack, or other catastrophic event occurred?

Based on history, an ongoing market panic is a very real possibility. In the event of a global war, a much longer trading curb could easily limit investor access to funds and trading markets for an extended period.

Without warning, the stock markets could close for an indefinite period. Are you prepared for that possibility?

As George Santanya wrote in 1905, “Those who cannot remember the past are condemned to repeat it.” It may be wise to act accordingly.

Sources:

(1) http://www.businessinsider.com/world-stock-market-capitalizations-2016-11

(2) https://www.globalfinancialdata.com/gfdblog/?p=2750

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