Black Monday

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Oct. 19, 1987, is commonly known as Black Monday among those in the financial industry. On this day, the Dow Jones Industrial Average (DJIA) dropped by 508 points to 1739 (or 22.6 percent), and similar declines occurred in stock indexes around the world. The slip in the stock market signified the largest one-day decline in equity market history.

Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached. Following Black Monday, program trading and the futures markets initially were tagged with the meltdown, only later to be exonerated as noted market academicians and other market experts reviewed the exchanges' operations during the period.

The 1987 sell-off was said to have been fueled in part by "portfolio insurance," a strategy used by large institutions in hopes of minimizing losses. But as stocks began sliding on Black Monday, the institutions’ computers sold stock-index futures, which only magnified the selling pressure.[1]

Despite strong economic growth and a euphoria in the financial markets, the Securities and Exchange Commission (SEC) was unable to prevent shady initial public offerings (IPOs) and conglomerates from proliferating. In early 1987, the SEC conducted numerous investigations of illegal insider trading. This created a wary stance from many investors at this point. Also, due to the extremely strong economic growth, inflation was becoming a concern. The Federal Reserve rapidly raised short-term interest rates to temper inflation. This, unfortunately, had the effect of hurting stocks as well.[2]

Following the market crash, exchanges across the world implemented trading halts or "circuit breakers," to better coordinate market activity during periods of extreme market stress. These circuit breakers still exist and are used today. In addition, the Federal Reserve became more vigilant regarding the possible need to pump liquidity into the system to avoid further down drafts.

Resources

References

  1. Black Monday: Never Again?. Los Angeles Times.
  2. Black Monday - The Stock Market Crash of 1987. Stock Market Crash - The History Of Financial Train Wrecks.