The 1987 stock market crash refers to the selloff that occurred on “Black Monday,” October 19. It was the largest single-day decline in the history of the US stock market–the Dow Jones Industrial Average (DJIA) lost 22.6%. While it was a massive decline, it was short-lived.
In August of 1987 the DJIA peak at 2,722 and drifted a bit lower. Troubles began in mid-October. On October 14 the DJIA dropped 3.8% and another 2.4% on October 15. On October 16 the DJIA fell 4.6%, which was a Friday. The Eastern markets were the first to open on Monday (Sunday in the US) and experienced massive selling. The selling continued during the London session followed by US session.
While the selloff shook investors, and the regulators and economists who tried to make sense of it, by early 1989 the DJIA reclaimed its 2,272 high. The decline was swift and relatively brief compared to other historical crashes (like 1929) that lasted much longer.
The crash is often blamed on “program trading” or computer programs that sold stock in mass. Others blame conflicts that were taking place during this time between Iran and US. There were also some pricing differences between New York and Chicago which caused traders to buy in one market and sell in the other. This coupled with the program trading, and portfolios trying to hedge, created a financial storm. These all may have contributed to the crash. Articles in the Further Reading section below discuss the political and economic climate of the late 80’s in more detail.
Lessons From ’87 Crash
Ultimately, the cause of a crash or selloff doesn’t matter much. The lesson is that selloffs happen with regularity. When trading, risk management is important…especially if short-term trading and a significant decline could decimate the account. If long stocks and prices start to fall, get out at a pre-determined level or with a pre-determined method. While prices may eventually recover, they may not do so within the timeframe you require. The crash of 1987 started with several smaller declines which would have gotten short-term traders out of most of their long positions before the major selloff on Black Monday.
