Black Monday occurred on Oct. 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day, igniting a global stock market decline that would go down as one of the most panic-filled days in financial history. By the end of October, most major stock exchanges had plummeted more than 20% in value.
Economists have linked the crash to a mix of geopolitical tensions and the automations in computerized program trading that exacerbated the selloff.
Key Takeaways
- Significant Decline: Black Monday refers to the massive market decline on Oct. 19, 1987, when the DJIA lost almost 22% in a single day, triggering a global downturn.
- Market Protections: The SEC created mechanisms such as trading curbs and circuit breakers to prevent panic-selling.
- Investor Strategies: Investors can implement strategies to address potential future market crashes, inspired by lessons from Black Monday.
Causes of Black Monday
The drastic drop wasn’t connected to any single news release prior to the crash, but several factors collectively generated an atmosphere of investor panic:
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Overdue Market Correction: A strong bull market since 1982 was overdue for a significant correction, having seen stock prices triple.
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Program Trading: Increased automated trading at Wall Street firms played a critical role. Program trading, relying on computer-driven buy/sell orders based on preset models, contributed substantially to the market’s volatility.
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Portfolio Insurance: A key factor at the heart of Black Monday, portfolio insurance aimed to hedge stock portfolios against market risk by short-selling stock index futures, leading to more sell-offs as pre-set loss thresholds were met.
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Triple Witching: On the preceding Friday, Oct. 16, the simultaneous expiry of stock options and futures contracts resulted in high volatility.
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Mass Panic: Events like geopolitical strains and shocking media reports fueled investor anxiety, which snowballed into panic selling.
Aftermath of Black Monday
Post-crash, the Federal Reserve cut interest rates to stimulate lending and injected billions into the economy. New regulatory mechanisms like circuit breakers were introduced to halt trading during extreme price moves, aiming to prevent future flash crashes.
Circuit breakers trigger halts in trading based on specific decline levels in key indices, such as the S&P 500. For example, a 7% drop entails a 15-minute halt.
Can It Happen Again?
Despite protections, the rise of high-frequency trading (HFT) algorithms increases volatility. The 2010 Flash Crash highlighted this risk, with markets briefly plummeting 10% due to errant HFT, prompting stronger regulation and tighter price bands.
The 2020 global pandemic resulted in similarly sharp market declines, though recovery was relatively swift.
Lessons From Black Monday and Other Market Crashes
Market crashes, while severe, tend to be short-lived. The following lessons provide guidance:
Stick With Your Strategy
A solid, long-term investment strategy offers the resolve to avoid panicking during downturns.
Buying Opportunities
Market downturns are opportunities to buy mispriced stocks or funds.
Turn Off the Noise
Over time, temporary declines are minor. Long-term planning prevails over reacting to short-term events and media noise.
Other Black Mondays
While Oct. 19, 1987, is the most famous, other significant Monday crashes have occurred:
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Oct. 28, 1929: Stocks fell 12.8%, worsening the Great Depression.
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August 24, 2015: Triggered by China’s economic concerns, DJIA fell 1,089 points at the open but recovered somewhat by close.
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March 9, 2020: Pandemic fears led to a nearly 8% drop, followed by successive declines.
Why Is It Called Black Monday?
The term applies to any severe, sudden Monday downturn. It was first reportedly coined regarding the 1954 Brown v. Board of Education ruling but has since been used for various economic calamities.
The Bottom Line
Black Monday signifies the dire 1987 global market crash, marking it as a day of significant financial upheaval and panic. US stock markets, however, demonstrated resilience by surpassing pre-crash highs within two years. Subsequent safeguards aim to avert such acute crises.
Related Terms: Flash Crash, Great Depression, Stock Market Volatility, Circuit Breakers.
References
- Library of Congress-Research Guides. “The Black Monday Stock Market Crash”.
- The United States Department of Justice. “Future Trader Pleads Guilty to Illegally Manipulating The Futures Market in Connection With 2010 Flash Crash”.
- History. “Stock Market Crash of 1929”.
- Federal Reserve History. “Stock Market Crash of 1987”.
