U.S. Stock Market Crashes on “Black Monday” Summary

  • Last updated on November 10, 2022

After sliding downward for weeks, stock prices on the New York Stock Exchange collapsed, causing fears of a repetition of the crash of 1929.

Summary of Event

Throughout the late summer and early autumn of 1987, the prices of stocks on the New York Stock Exchange (NYSE) fell irregularly. Some analysts thought a major “correction” was coming, believing that prices were higher than merited by the earnings and financial outlooks of companies. Other analysts were convinced that there would be a rise in prices. In retrospect, it is not difficult to isolate elements in the market structure that indicated a major collapse. At the time, however, a drop of several hundred points in the Dow Jones Industrial Average Dow Jones Industrial Average (DJIA)—a weighted average of the prices of the stocks of thirty major companies—in a single session seemed farfetched. Black Monday (stock market crash) Stock market crash (1987) New York Stock Exchange;Black Monday [kw]U.S. Stock Market Crashes on “Black Monday” (Oct. 19, 1987) [kw]Market Crashes on “Black Monday”, U.S. Stock (Oct. 19, 1987) [kw]Stock Market Crashes on “Black Monday”, U.S. (Oct. 19, 1987) [kw]Crashes on “Black Monday”, U.S. Stock Market (Oct. 19, 1987) [kw]"Black Monday", U.S. Stock Market Crashes on (Oct. 19, 1987) Black Monday (stock market crash) Stock market crash (1987) New York Stock Exchange;Black Monday [g]North America;Oct. 19, 1987: U.S. Stock Market Crashes on “Black Monday”[06570] [g]United States;Oct. 19, 1987: U.S. Stock Market Crashes on “Black Monday”[06570] [c]Banking and finance;Oct. 19, 1987: U.S. Stock Market Crashes on “Black Monday”[06570] [c]Economics;Oct. 19, 1987: U.S. Stock Market Crashes on “Black Monday”[06570] Greenspan, Alan Baker, James Brady, Nicholas F.

On August 25, 1987, the Dow Jones Industrial Average closed at 2,747, a new high. Stock prices had more than tripled in the past five years, and the market had advanced 43 percent since the beginning of the year. The market then began to falter, perhaps in fear of a correction. Some analysts warned of a repetition of the 1929 crash, but the stock market as a whole in 1987 was quite different from the market in 1929, making comparisons unproductive. For one thing, the stock market by 1987 was global, with New York, Tokyo, and London inextricably tied together. New financial instruments and techniques had developed in the 1970’s and 1980’s, along with changes in the customer base.

One change came in 1973, when the Chicago Board of Trade created the Chicago Board Options Exchange. Chicago Board Options Exchange Options, which are contracts to purchase or sell a specified number of shares of a stock at a set price on or before a specified time, offered a new way to wager on the price of shares or to hedge a position, protecting against a movement in a stock’s price. Other options markets Options markets followed, along with additional derivative instruments. There were options on stock indices, options on stock groups, and even options on options.

These options were used imaginatively by speculators sitting in front of computer consoles, using software that triggered sales and purchases. Arbitrageurs, who simultaneously bought and sold stocks or options to profit from disparities in the markets, would buy options on a stock index and sell the underlying shares, or do the reverse, when profits might be realized, leading to wide activity and swings in prices. A trade triggered by one computer might be large enough to change prices enough to trigger other computers, making the process rapid, interactive, and volatile. On the day options expired—when the contracts to buy or sell had to be fulfilled or settled— trading activity could be wild and unpredictable.

Newspapers across the U.S. headlined the stock market plunge of Monday, October 19, 1987.

(AP/Wide World Photos)

Another new feature of the markets was portfolio insurance. A portfolio manager could sell index futures, with the cash from the sale used to offset price declines. As stock prices moved in one direction, the value of the futures changed to offset the gain or loss. Most investors did not know what portfolio insurance was, but there was between $60 billion and $90 billion of it in force in the summer of 1987.

As a result of the trade deficit of the United States and the lure of American securities, a substantial amount of foreign money entered the U.S. stock market. Pension funds were big players, as were insurance companies and trust accounts. There had been an explosion in mutual funds as small investors pooled their money to invest in diversified portfolios. Together these institutions owned half the shares in American companies and accounted for approximately 70 percent of trading activity.

To this mix were added other major factors. One was the climax of takeover activity, as corporate raiders such as T. Boone Pickens, Pickens, T. Boone Carl Icahn, Icahn, Carl and Sir James Goldsmith Goldsmith, James went after large companies, causing their share prices to rise. Several Wall Street figures already had been caught conducting insider trading—that is, using nonpublic information to profit on stock transactions. The prospect of further investigation into insider trading unsettled the financial community. More important was a February meeting of world financial leaders in Paris. They had agreed to maintain the relative value of their currencies, and toward that end Secretary of the Treasury James Baker had agreed to bring down the U.S. federal deficit. At the same time, the Japanese and the Germans would stimulate their countries’ economies. The dollar started to decline in value anyway, causing consternation in the money markets.

On September 4, Federal Reserve Board chairman Alan Greenspan announced a boost from 5.5 to 6 percent in the discount rate, the interest rate that Federal Reserve banks charge for loans to other banks. This indicated that Greenspan meant to fight the inflation that was likely to come with the lower dollar. Greenspan also may have wanted to stifle the vigorous bull market. Bond prices collapsed at the prospect of higher interest rates. The DJIA responded by declining 37 points that day, 38 the following day, and 16 on September 9 before leveling at 2,545. The market then rallied and closed the month at 2,596.

The market was skittish in early October, as meetings between President Ronald Reagan Reagan, Ronald and German leaders collapsed, leading to suspicion that the accords reached in Paris would not be honored. The U.S. trade deficit was larger than expected, and there was talk of raising taxes to balance the budget. The DJIA fell 92 points on October 6, closing at 2,549, and continued to slide on the days following. Between then and October 15, there were only two days on which the DJIA rose. On Friday, October 16, the DJIA lost 108 points to close at 2,247.

Even before the market opened on the following Monday, it was apparent that trading would be unsettled. Portfolio insurance and arbitrage activities, in addition to developing panic, would pull the market down. Later it was learned that major mutual and pension funds had placed large sell orders before the opening. Arbitrageurs were in action, placing their sell orders. Later it would be learned that five money managers had placed sell orders on contracts worth $4 billion before the opening. Meanwhile, Wall Street learned of sharp declines on the Tokyo and London markets.

With these factors in place, it is not surprising that stocks opened at 2,047, 200 points lower than the Friday close, on heavy volume. The DJIA then rose 100 points in half an hour, on record volume. Panic selling developed around the world. Many would-be sellers could not get through to their brokers. NYSE specialists in certain stocks suspended trading because they were unable to find support levels, at which prices buyers would balance sellers. Market makers for the National Association of Securities Dealers Automated Quotations (NASDAQ) NASDAQ market, an over-the-counter trading exchange, also refused to deal in some shares. Even so, prices held remarkably steady throughout the morning and early afternoon. The DJIA was at 2,053 at 1:30 p.m., but it collapsed, closing at 1,739. In one day, more than one trillion dollars in stock values had been wiped out on the NYSE, on a volume of 604 million shares. The DJIA had fallen 508 points, more than one-fifth of its value.

Largely unnoticed in all of this was a sharp rise in the bond market, which received a good deal of the money that went out of stocks. This was significant because the government bond market, by itself, was ten times larger than the stock market. Gains in bonds more than outweighed losses in stocks. That night, analysts spoke ominously of the crash and what might follow. Given more attention was the announcement that the Federal Reserve banks would aggressively purchase government bonds, thus providing financial markets with needed liquidity.

Significance

That night, the stock markets of other countries plunged. Tokyo’s Nikkei index fell 15 percent, and the slump in London continued, with a 22 percent loss in two sessions. The same held true in secondary markets. Singapore’s was down 21 percent, Australia’s fell 25 percent, and those in Hong Kong and New Zealand simply shut down. If proof was needed that the world’s markets were connected, it was provided early that week.

The NYSE opened up 211 points the following day, Tuesday, October 20, and for a while it seemed that the hoped-for “bounceback” had taken place. The DJIA then fell almost 100 points in the first half hour, rallied, and then fell again. By 12:30 p.m., it was at 1,712 and falling. In retrospect, this was the key moment in the panic. Stocks held at this level, rose, fell again, and rallied in the last three hours to close at 1,841, up 103 points on the day, its first triple-digit gain.

The market rose 187 points on Wednesday, fell 78 points on Thursday, and rose by 1 point on Friday to close the week at 1,950. There was a 157-point loss the following Monday, but trading volume indicated that it was not caused by a panic. Rallies enabled the DJIA to end the month at 1,994. The index had lost more than 600 points in October.

During that month, scare headlines and dour predictions prompted thoughts that the events that began on what became known as Black Monday would follow the pattern of 1929. The New York Times charted the 1987 market against that of 1929. The market’s recovery and continued strength soon caused such fears to dissipate, and by mid-November it appeared that all would indeed be well.

The shake-up in the stock market apparently had not caused more widespread problems. Payrolls swelled in October in the best performance since September, 1983. During the first ten months of 1987, factory employment expanded by 26,700 jobs per month, compared with average monthly losses of 30,000 in 1985 and 13,500 in 1986. Department store sales increased on a year-to-year basis by 1.4 percent, while consumer spending rose by 0.5 percent. Christmas sales in 1987 reached a new record. The Commerce Department later reported that the U.S. gross national product had advanced by an annualized rate of 4.1 percent during the third quarter of 1987.

Foreign central banks began reducing their key interest rates, led by the German Federal Bank (Deutsche Bundesbank), which reduced short-term rates from 3.5 percent to 3.25 percent. There was talk of a new international monetary conference. Lower interest rates may have invigorated spending in other countries, increasing U.S. exports and lessening pressure on the trade deficit.

By the year’s end, several fact-finding commissions were at work investigating the crash. One, sponsored by the federal government, was headed by former U.S. senator from New Jersey and future secretary of the treasury Nicholas F. Brady. The NYSE conducted its own investigation, chaired by former U.S. attorney general Nicholas de Belleville Katzenbach. Katzenbach, Nicholas de Belleville In addition, investigations were conducted by the Chicago Board of Trade, the Chicago Mercantile Exchange, and the U.S. Congress’s General Accounting Office. As might have been expected, the Chicago Board of Trade report exonerated the options market from blame, and the NYSE report did the same for its specialists. The Brady group, the most impartial of the lot, placed most of the blame for the crash’s severity on portfolio insurance and program traders, the traders who placed huge orders based on computer programs.

After completing its investigation, the Brady Commission Brady Commission put forth several recommendations. The first involved “circuit breakers” between the stock indexes and the market. When certain disparities developed, trading would be suspended temporarily. In addition, all trading would be halted when prices declined by a specified figure. The commission also recommended greater regulatory oversight of index options markets and higher margins (percentages of the value of an option that a buyer had to put up front) to be employed in their use. In addition, the commission wanted a single agency to oversee the entire stock market. Some thought it should be the Securities and Exchange Commission, whereas others suggested it should be the Federal Reserve Board. The Brady group also recommended greater cooperation among the stock exchanges and a greater amount of disclosure of information. All these recommendations were adopted, with the Federal Reserve Board being assigned the task of oversight.

Bargain hunters bought many of the stocks that had fallen in price, aiding recovery of the market. Overall, losses were largely erased within two years of the crash. A smaller crash occurred in 1989, but share prices recovered and the DJIA soon flirted with the 3,000 level. Within the subsequent decade, it more than tripled to a level well above 11,000. Black Monday (stock market crash) Stock market crash (1987) New York Stock Exchange;Black Monday

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Barro, Robert J., et al. Black Monday and the Future of Financial Markets. Homewood, Ill.: Dow Jones Irwin, 1989. Offers a scholarly, technical account of the crash along with an analysis of how future shocks can be prevented.
  • citation-type="booksimple"

    xlink:type="simple">Bose, Mihir. The Crash: Fundamental Flaws Which Caused the 1987-1988 World Stock Market Slump and What They Mean for Future Financial Stability. London: Bloomsbury, 1988. Valuable for insights regarding the interrelations of world financial markets.
  • citation-type="booksimple"

    xlink:type="simple">Hughes, Jonathan, and Louis P. Cain. American Economic History. 6th ed. Boston: Addison-Wesley, 2002. Comprehensive volume on the economic history of the United States includes discussion of the 1987 stock market crisis.
  • citation-type="booksimple"

    xlink:type="simple">Kindleberger, Charles P., and Robert Aliber. Manias, Panics, and Crashes: A History of Financial Crises. 5th ed. New York: John Wiley & Sons, 2005. General survey of financial speculation and monetary crises from the eighteenth century to the early twenty-first century. Includes discussion of the 1987 stock market crash.
  • citation-type="booksimple"

    xlink:type="simple">Sobel, Robert. Panic on Wall Street: A History of America’s Financial Disasters. Rev. ed. Washington, D.C.: Beard Books, 1999. Reissue of an earlier work includes a new chapter on the panic of 1987 that stresses the differences between that event and the stock market crash of 1929.
  • citation-type="booksimple"

    xlink:type="simple">U.S. Congress. House. Committee on Banking, Finance, and Urban Affairs. Impact of the Stock Market Drop and Related Developments on Interest Rates, Banking, Monetary Policy, and Economic Stability. 100th Congress, 2d session, 1988. Discussion and analysis of the Brady Report. By the time of the hearings it had become evident that the crash would have no long-lasting effects, but the legislators did think in terms of reform.
  • citation-type="booksimple"

    xlink:type="simple">Wood, Christopher. Boom and Bust: The Rise and Fall of the World’s Financial Markets. New York: Atheneum, 1989. Presents a journalistic account of the crash, including information on its causes and its aftermath.

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