Art Markets and Stock Markets. This past week marked the 30th anniversary of Black Monday. That is the day in 1987 when stock markets around the world crashed, beginning with Hong Kong, spreading to Europe and ultimately to the US where the Dow Jones Industrial Average (DJIA) fell 22.6%. To this day it is still the largest one-day percentage decline in the DJIA. Importantly, it was the first truly global financial panic that impacted exchanges around the world. There are plenty of theories for why the global markets swooned, but most of the blame falls on the acceleration of computerized program trading involving both institutional markets and pension funds plus mass speculation on the part of individual investors.
Beyond the obvious reasons, this day is memorable to me because it was my first day working for the Regents of the University of California in their pension and endowment group. And instead of running for the hills, the Treasurer was actively buying blue chip stocks, finding bargains for the top-quality names that made up the portfolios at that time. I was amazed, perplexed and exhilarated by the activity of the traders.
I learned a great lesson about human nature, and the markets that day. I realized it took great conviction and a sense of history on the part of the Treasurer to go against the direction of what seemed to be a major turning point in the markets. Armed with an understanding of economic and market trends, the Treasurer was convinced that the underlying economy was still strong and that the market rout was then more of a technical move than a fundamental one. She turned out to be right, and the timing of her investment strategy was spot on.
Booms and Busts. What does this have to do with the art market? Plenty. Like investors in the stock market, art buyers have also been susceptible to booms and busts going back as far as the mid-1500’s when the modern art market emerged during what is termed the Dutch Golden Age of Art, a time when the Netherlands became the most prosperous nation in Europe. A booming economy and vibrant financial markets supported the emergence of a middle class who were eager to participate in the profits being generated by a growing number of multinational corporations. The rise of professional art dealers accompanied the large quantities of art being sold, with art fairs proliferating that could cater to the growing speculation in the art market.
When the Anglo-Spanish war broke out in 1585, the art market collapsed, temporarily affecting the emergent middleclass market and its demand for art. Despite this downturn, The Golden Age of Art ended up spanning the 17th century. In addition to the proliferation of art produced during this period, it is famous for the emergence of some of the most historically relevant artists, like Rembrandt, Vermeer and Frans Hal.
This account is but a fragment of a fascinating period in art history, but the point I am making is that the cycles of boom and bust churn their way through history. The booming global art market that arose from the great recession of 2008-2009 seems to mimic the distant past. We too have seen a huge volume of art hitting the international marketplace via a multitude of biennials and the emergence of super dealers. EBAY touts volumes of inexpensive works available to an expanding number of newly minted art consumers, while at the other end of the market, proven masterpieces are being auctioned off at eight digit prices.
The more things change….At the same time, we are seeing the U.S. stock market once again hit new highs, despite underlying concerns of changing dynamics in the global economy, and a transitioning credit cycle. History teaches us that exuberance and mass speculation in any market will ultimately end, as we have seen this year in the marketplace for works of emerging art. It may be triggered by a fundamental change in the economy, an external event or due to a technical hiccup in the marketplace. It may last just a few weeks, or it may last over a number of years.
We’ve been fortunate since 2008-2009 when the great recession brought the global marketplace to its knees. But at some point, we will once again participate in a major shift as the markets change course, and the conditions that feed booming demand for stocks or art, or both, dry up. But at that moment when the market seems to have lost the ability to go back up, as it seemed at the bottom of that one day decline in October 1987, again at the bottom of the market rout in March 2009 or in the midst of the Dutch war for independence in the 17th century, those with conviction and a sense of history will have the courage to step back in to support the next bull cycle.
For those interested in reading a fascinating account of booms and busts throughout history, I recommend “Extraordinary Popular Delusions and the Madness of Crowds,” by Charles MacKay, LL.D. It may come in handy in the decade to come!