Monday, Oct. 19, 1987, is remembered as Black Monday. On that day, global stock exchanges plunged, led by the Standard & Poor's (S&P) 500 Index and Dow Jones Industrial Average (DJIA) in the U.S. The strain sent world markets tumbling. Only quick reaction from the U.S. Federal Reserve Bank (it cut rates immediately, and provided other liquidity measures to calm markets) allowed markets to stabilize over the coming weeks.
It was a striking wake-up call for the market, individual investors, and the Fed, seeing the gains of the prior year wiped out in a matter of hours. Worse, there was no compelling fundamental reason for the crash, which occurred mainly as a result of programmatic trading and investor panic. (The weekly chart below depicts the scale of the losses in just two weeks versus all the gains of the prior year.)
KEY TAKEAWAYS
In the "Black Monday" stock market crash of Oct. 19, 1987, U.S. markets fell more than 20% in a single day.
Black Monday was preceded by a bearish week in which the headline indexes gave up around 10% for the week.
It is thought that the cause of the crash was program-driven trading models that followed a portfolio insurance strategy, in tandem with investor panic.
Precursors of the 1987 crash can be found in a series of monetary and foreign trade agreements that depreciated the U.S. dollar (the Plaza Accord) to adjust trade deficits, then tried to stabilize the dollar at its new, lower value (the Louvre Accord).
Program Trading
The week before the 1987 crash, having come off a very bad week just before (with the S&P down more than 9%), sell orders piled upon sell orders as the new week began.
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From the open on the following Monday, Oct. 19, 1987, the S&P 500 and Dow Jones Industrial Average (DJIA) both shed in excess of 20% of their value.
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There had been talk of the U.S. entering a bear cycle—the market bulls had been running since 1982—but the markets gave very little warning of what lay ahead to the then-new Federal Reserve, Chair Alan Greenspan
Black Monday Trading Chart
Greenspan hurried to slash interest rates and called upon banks to flood the system with liquidity. He had expected a drop in the value of the dollar due to an international tiff with the other G-7 nations over the dollar's value, but the seemingly worldwide financial meltdown came as an unpleasant surprise that Monday.
Exchanges also were busy trying to lock out program trading orders. The idea of using computer systems to engage in large-scale trading strategies was still relatively new to Wall Street, and the consequences of a system capable of placing thousands of orders during a crash had never been tested.
