Wednesday 19, October 2022, marks 35 years since the chaos remembered as Black Monday of October 19, 1987, that sent the DJIA index plummeting 22.6% and the S&P 500 crashing by 20.4% in a single day. That day marked the start of a new global stock market correction.
Such drastic one-day falls have not happened since, although there were several standout periods when investors were anticipating similar damage. What were the reasons behind the crash?
Many market analysts say that the Black Monday crash of 1987 was mainly caused by an overheated bull market that did not have a single major correction for five consecutive years preceding the crash. Stock prices had more than tripled in value in the previous four and a half years, rising by 44% in 1987 alone.
The other cause analysts believe played into the severity of the crash was a lack of the “circuit breakers” in place to stop the panic on the market. Computerized trading was a new thing back in those days. When these trading software programs emerged on the market, they executed stop-loss orders automatically if stocks dropped by a certain percentage. Back then, there were no “circuit breakers” that temporarily paused trading in case of a sharp market decline and prevented the system from creating a domino effect. The initial losses prompted a flurry of stock selling, which pushed the stock prices down even further, triggering the spiral of more rounds of computer-driven selling
A third reason for the crash is attributed to portfolio insurance strategies. Back then portfolio management was also quite a new thing, and many institutional investors partially hedged their stock portfolios through short positions in S&P futures. Similar to automated stop-loss orders, the portfolio insurance strategies were designed to automatically sell S&P futures in case of a substantial significant drop in stock prices. As stock prices tumbled, large investors sold short more S&P 500 futures contracts triggering an avalanche of reciprocal downward pressure on the stock market and S&P 500 futures contracts.
The difference between Black Monday and 2022 is that there has not been a case of investors so frantically rushing for the exit at the same time this year. Not many people think the market crash of October 1987 is going to repeat itself now. Times are different now, and the market is dramatically higher today than it was 35 years ago.
On Black Monday, when the Dow Jones crashed by 22,6%, it fell exactly 508 points to 1,738.74. On September 18, 2022, the Dow Jones Industrial Average slid 1,276.37 points, but that amounted only to 3.94%. Yes, the drop pushed the DJIA further down the bear market territory, but for another Black Monday to happen again, the DJIA would have to drop over 7,200 points in a day. This hardly looks like a realistic scenario for now, unless some global forces bring a major devastating effect on the market.