Black Monday (1987) In finance, Black Monday refers to Monday,
October 19, 1987, when stock markets around the world crashed, shedding a huge value in
a very short time.
The crash began in Hong Kong and spread west to Europe, hitting the United States after
other markets had already declined by a significant margin.
The Dow Jones Industrial Average dropped by 508 points to 1738.74 .
In Australia and New Zealand the 1987 crash is also referred to as Black Tuesday because
of the timezone difference.
The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which
occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929.
Market effects Stock markets raced upward during the first
half of 1987.
The Dow Jones Industrial Average had gained 44% in a matter of seven months.
Beginning on October 14, a number of markets began incurring large daily losses.
By the end of October, stock markets in Hong Kong had fallen 45.5%, Australia 41.8%, Spain
31%, the United Kingdom 26.45%, the United States 22.68%, and Canada 22.5%.
New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and
taking several years to recover.
The Black Monday decline was the largest one-day percentage decline in the Dow Jones.
(Saturday, December 12, 1914, is sometimes erroneously cited as the largest one-day percentage
decline of the DJIA.
In reality, the ostensible decline of 24.39% was created retroactively by a redefinition
of the DJIA in 1916.)
Following the stock market crash, a group of 33 eminent economists from various nations
met in Washington, D.C. in December 1987, and collectively predicted that “the next
few years could be the most troubled since the 1930s”.
However, the DJIA was positive for the 1987 calendar year.
It opened on January 2, 1987 at 1,897 points and closed on December 31, 1987 at 1,939 points.
The DJIA did not regain its August 25, 1987 closing high of 2,722 points until almost
two years later.
Timeline In 1986, the United States economy began shifting
from a rapidly growing recovery to a slower growing expansion, which resulted in a "soft
landing" as the economy slowed and inflation dropped.
The stock market advanced significantly, with the Dow peaking in August 1987 at 2722 points,
or 44% over the previous year's closing of 1895 points.
On October 14, the DJIA dropped 95.46 points (3.8%) (a then record) to 2412.70, and fell
another 58 points (2.4%) the next day, down over 12% from the August 25 all-time high.
On Thursday, October 15, 1987, Iran hit the American-owned supertanker, the Sungari, with
a Silkworm missile off Kuwait's main Mina Al Ahmadi oil port.
The next morning, Iran hit another ship, the U.S. flagged MV Sea Isle City, with another
Silkworm missile.
On Friday, October 16, when all the markets in London were unexpectedly closed due to
the Great Storm of 1987, the DJIA closed down another 108.35 points (4.6%) to close at 2246.74
on record volume.
American Treasury Secretary James Baker stated concerns about the falling prices.
The crash began in Far Eastern markets the morning of October 19.
Later that morning, two U.S. warships shelled an Iranian oil platform in the Persian Gulf
in response to Iran's Silkworm missile attack on the Sea Isle City.
Causes Possible causes for the decline included program
trading, overvaluation, illiquidity, and market psychology.
A popular explanation for the 1987 crash was selling by program traders, most notably as
a reaction to the computerized selling required by portfolio insurance hedges.
However, economist Dean Furbush points out that the biggest price drops occurred when
trading volume was light.
In program trading, computers perform rapid stock executions based on external inputs,
such as the price of related securities.
Common strategies implemented by program trading involve an attempt to engage in arbitrage
and portfolio insurance strategies.
As computer technology became more available, the use of program trading grew dramatically
within Wall Street firms.
After the crash, many blamed program trading strategies for blindly selling stocks as markets
fell, exacerbating the decline.
Some economists theorized the speculative boom leading up to October was caused by program
trading, and that the crash was merely a return to normalcy.
Either way, program trading ended up taking the majority of the blame in the public eye
for the 1987 stock market crash.
U.S. Congressman Edward J. Markey, who had been warning about the possibility of a crash,
stated that "Program trading was the principal cause."
New York University's Richard Sylla divides the causes into macroeconomic and internal
reasons.
Macroeconomic causes included international disputes about foreign exchange and interest
rates, and fears about inflation.
Economist Richard Roll believes the international nature of the stock market decline contradicts
the argument that program trading was to blame.
Program trading strategies were used primarily in the United States, Roll writes.
Markets where program trading was not prevalent, such as Australia and Hong Kong, would not
have declined as well, if program trading was the cause.
These markets might have been reacting to excessive program trading in the United States,
but Roll indicates otherwise.
The crash began on October 19 in Hong Kong, spread west to Europe, and hit the United
States only after Hong Kong and other markets had already declined by a significant margin.
Another common theory states that the crash was a result of a dispute in monetary policy
between the G7 industrialized nations, in which the United States, wanting to prop up
the dollar and restrict inflation, tightened policy faster than the Europeans.
U.S. pressure on West Germany to change its monetary policy was one of the factors that
unnerved investors in the run-up to the crash.
The crash, in this view, was caused when the dollar-backed Hong Kong stock exchange collapsed,
and this caused a crisis in confidence.
Some technical analysts claim that the cause was the collapse of the US and European bond
markets, which caused interest-sensitive stock groups like savings & loans and money center
banks to plunge as well.
This is a well documented inter-market relationship: turns in bond markets affect interest-rate-sensitive
stocks, which in turn lead the general stock market turns.
Federal Government's Response Amidst the financial turmoil, the Fed encouraged
banks to continue to lend to one another on their usual terms.
The banks did this at a loss, but it preserved the system as a whole.
Some experts argue the Fed's response to Black Monday ushered in a new era of investor confidence
in the central bank's ability to calm severe market downturns.
Regulation After Black Monday, regulators overhauled
trade-clearing protocols to bring uniformity to all prominent market products.
They also developed new rules, known as circuit breakers, allowing exchanges to halt trading
temporarily in instances of exceptionally large price declines.
For example, under current rules, the New York Stock Exchange will temporarily halt
trading when the S&P 500 stock index declines 7 percent, 13 percent, and 20 percent in order
to allow investors to make informed choices when the market is highly volatile.