BLACK MONDAY (1987)

'Black Monday' is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) dropped dramatically, and on which similar enormous drops occurred across the world. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. (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.)
The Black Monday decline was the second largest one-day percentage decline in stock market history. The largest one occurred on Saturday, December 12, 1914, when the DJIA fell 24.39%. However, in that case, the New York market had been closed since July due to the outbreak of the First World War. The greatest point loss in DJIA history was on Monday, September 17, 2001, 684.81 points, six days after the September 11, 2001 attacks and the first day after which the market was open.
A certain degree of mystery is associated with the 1987 crash. Many have noted that no major news or events occurred prior to the Monday of the crash, the decline seeming to have come from nowhere. Important assumptions concerning human rationality, the efficient market hypothesis, and economic equilibrium were brought into question by the event. Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached.
In the wake of the crash, markets around the world were put on restricted trading primarily because sorting out the orders that had come in was beyond the computer technology of the time. This also gave the Federal Reserve and other central banks time to pump liquidity into the system to prevent a further downdraft. While pessimism reigned, the market bottomed on October 20, leading some to label Black Monday a "selling climax", where the excess value was squeezed out of the system.

Contents

Causes

Impact on popular culture

See also

Further reading

References

External links

Causes

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. As 1987 wore on, it seemed that recessionary fears were not warranted and that boom times would continue. The stock market advanced significantly, peaking in August 1987 at 2722 points, or 44% over 1986 closing at 1895 points. There were a series of volatile days that caused widespread nervousness leading up to the crash, with the market ultimately sliding downward. In late August some observers warned that technical analysis indicated the market was now in a cyclical "bear" mode. However, this view was not widely subscribed to even as the market traded wildly.
Potential causes for the decline include program trading, overvaluation, illiquidity, and market psychology. These theories have only partial success in explaining why the market fell so far and fast, why the drop was international in nature and not unique to American markets, and, especially, why the crash occurred on October 19 and not some other day.
The most popular explanation for the 1987 crash was selling by program traders.^[1] Program trading is the use of computers to engage in arbitrage and portfolio insurance strategies. Through the 1970s and early 1980s, computers were becoming more important on Wall Street. They allowed instantaneous execution of orders to buy or sell large batches of stocks and futures. 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, while others argued that the crash was 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.
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. If program trading caused the decline, why would markets where program trading was not prevalent, such as Australia and Hong Kong, have declined as well? Although these markets might have been reacting to excessive program trading in the United States, Roll points to observations that would indicate 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 G-7 industrialized nations, in which the United States, wanting to prop up the dollar and restrict inflation, tightened policy faster than the Europeans. The crash, in this view, was caused when the dollar-backed Hong Kong stock exchange collapsed, and this caused a crisis in confidence.
Jude Wanniski stated that the crash happened because of the breakup of the Louvre Accord, a monetary pact between the US, Japan, and West Germany to keep currencies stable. Just prior to the crash, Alan Greenspan had said that the dollar would be devalued.
Another theory is that the Great Storm of 1987 in England, which happened on the Friday before the crash, helped contribute to it. In 1987 there was no Internet trading, and brokers had to physically get to work in the City of London in order to do their deals. On Friday, October 16, many routes into London were closed and consequently many traders were unable to reach their offices in order to close their positions at the end of the week. This made many people nervous on both sides of the Atlantic and there were certainly some traders who believed at the time that this acted as the trigger for the panic selling which took place on Black Monday. Panic selling in London and New York, the biggest stock markets in the world, then affected other markets around the world, creating a global stock market crash.
Yet another theory for the 1987 crash was the random placement of sell orders in a sufficiently small time interval as to cause a sudden decline in the indices, leading to a cascade effect of further sell orders. In the days preceding the actual Black Monday crash the markets began to sell off, beginning with a sudden 5% selloff on Wednesday, three days before the actual crash. Prior to that Wednesday, the trend for the Nasdaq/DJIA was stable, and undergoing what could be interpreted as a normal correction. If one were to zoom in on Wednesday one would notice normal trading activity and then an abrupt 1% intra-day drop. This drop could have been triggered by randomly placed sell orders that happened to all trigger at once. Although the odds of this happening are very slim, there is a probability that sufficient random sell orders placed by institutions, insiders, and the like will trigger a cascade effect should enough sell orders be placed in a small enough time interval.
The initial small 1% selloff caused by the 'clumped' random sell orders may have prompted trend traders to liquidate their positions, resulting in a larger decline that simply fed on itself like a domino effect, ultimately leading to the 26% crash of Black Monday.

Impact on popular culture

As the dramatic decline hit the news, there was some concern in the public that this was a sign that an economic depression would soon strike the world economy as it did with the stock market crash in 1929. As a result, there were concerted media efforts to inform the public while allaying their fears about an economic disaster.
Disquiet was felt in some quarters regarding these efforts as it was perceived to be an effort on the part of corporate-owned media to limit losses of their own stock and that of their investors and associates, rather than an altruistic measure for the benefit of the economy in-general.

See also

★ Robert Prechter

★ Great Storm of 1987

Further reading

★ '"Brady Report"' Presidential Task Force on Market Mechanisms (1988): Report of the Presidential Task Force on Market Mechanisms. Nicholas F. Brady (Chairman), U.S. Government Printing Office.

★ Carlson, Mark (2007) "A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response," Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C.

★ Securities and Exchange Commission (1988): The October 1987 Market Break. Washington: The Securites and Exchange Commission.

★ Shiller, R. (1989): “Investor Behavior in the October 1987 Stock Market Crash: Survey Evidence,” in Market Volatility. Boston: Massachusetts Institute of Technology.

★ Robert Sobel ''Panic on Wall Street: A Classic History of America's Financial Disasters-With a New Exploration of the Crash of 1987'' (E P Dutton; Reprint edition, May 1988) ISBN 0-525-48404-3.

References

1. The Concise Encyclopedia of Economics, "Program Trading," by Dean Furbush accessed May 22, 2007

External links

★ Motley Fool's Black Monday 10th Anniversary 1987 Timeline

★ Black Monday 1987

★ Jack Harvey - "The Immortal Murderer"

★ CBC Reports on Black Monday