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Black Monday (1987)
Black Monday (also known as Black Tuesday in some parts of the world due to time zone differences) was a global, severe and largely unexpected stock market crash on Monday, October 19, 1987. Worldwide losses were estimated at US$1.71 trillion. The severity sparked fears of extended economic instability or a reprise of the Great Depression.
Possible explanations for the initial fall in stock prices include a fear that stocks were significantly overvalued and were certain to undergo a correction, persistent US trade and budget deficits, and rising interest rates. Another explanation for Black Monday comes from the decline of the dollar, followed by a lack of faith in governmental attempts to stop that decline. In February 1987, leading industrial countries had signed the Louvre Accord, hoping that monetary policy coordination would stabilize international money markets, but doubts about the viability of the accord created a crisis of confidence. The fall may have been accelerated by portfolio insurance hedging (using computer-based models to buy or sell index futures in various stock market conditions) or a self-reinforcing contagion of fear.
The degree to which the stock market crashes spread to the wider (or "real") economy was directly related to the monetary policy each nation pursued in response. The central banks of the United States, West Germany, and Japan provided market liquidity to prevent debt defaults among financial institutions, and the impact on the real economy was relatively limited and short-lived. However, refusal to loosen monetary policy by the Reserve Bank of New Zealand had sharply negative and relatively long-term consequences for both its financial markets and real economy.
During a strong five-year bull market, the Dow Jones Industrial Average (DJIA) rose from 776 in August 1982 to a peak of 2,722 in August 1987. The same bullish trend propelled market indices around the world over this period, as the nineteen largest enjoyed an average rise of 296 percent.
On the morning of Wednesday, October 14, 1987, the United States House Committee on Ways and Means introduced a bill to reduce the tax benefits associated with financing mergers and leveraged buyouts. Unexpectedly high trade deficit figures announced on October 14 by the United States Department of Commerce had a further negative impact on the value of the US dollar while pushing interest rates upward and stock prices downward. As the day continued, the DJIA dropped 95.46 points (3.81 percent) to 2,412.70, and it fell another 57.61 points (2.39 percent) the next day, down over 12 percent from the August 25 all-time high. On Friday, October 16, the DJIA fell 108.35 points (4.6 percent). The drop on the 14th was the earliest significant decline among all countries that would later be affected by Black Monday.
Though the markets were closed for the weekend, significant selling pressure still existed. The computer models of portfolio insurers continued to dictate very large sales. Moreover, some large mutual fund groups had procedures that enabled customers to easily redeem their shares during the weekend at the same prices that existed at the close of market on Friday. The amount of these redemption requests was far greater than the firms' cash reserves, requiring them to make large sales of shares as soon as the market opened on the following Monday. Finally, some traders anticipated these pressures and tried to get ahead of the market by selling early and aggressively on Monday, before the anticipated price drop.
Before the New York Stock Exchange (NYSE) opened on October 19, 1987, there was pent-up pressure to sell. When the market opened, a large imbalance arose between the volume of sell and buy orders, placing downward pressure on prices. Regulations at the time allowed designated market makers (or "specialists") to delay or suspend trading in a stock if the order imbalance exceeded the specialist's ability to fulfill in an orderly manner. The imbalance on October 19 was so large that 95 stocks on the S&P 500 Index (S&P) opened late, as also did 11 of the 30 DJIA stocks. Importantly, however, the futures market opened on time across the board, with heavy selling.
On that Monday, the DJIA fell 508 points (22.6 percent), accompanied by crashes in the futures exchanges and options markets, the largest one-day percentage drop in the history of the DJIA. The DJIA fell from 2,246.74 at the open to 1,738.74 at the close. Significant selling created steep price declines throughout the day, particularly during the last 90 minutes of trading. Deluged with sell orders, many stocks on the NYSE faced trading halts and delays. Of the 2,257 NYSE-listed stocks, there were 195 trading delays and halts that day. Total trading volume was so large that the computer and communications systems were overwhelmed, leaving orders unfilled for an hour or more. Large funds transfers were delayed and the Fedwire and NYSE SuperDot systems shut down for extended periods further compounding traders' confusion.
Hub AI
Black Monday (1987) AI simulator
(@Black Monday (1987)_simulator)
Black Monday (1987)
Black Monday (also known as Black Tuesday in some parts of the world due to time zone differences) was a global, severe and largely unexpected stock market crash on Monday, October 19, 1987. Worldwide losses were estimated at US$1.71 trillion. The severity sparked fears of extended economic instability or a reprise of the Great Depression.
Possible explanations for the initial fall in stock prices include a fear that stocks were significantly overvalued and were certain to undergo a correction, persistent US trade and budget deficits, and rising interest rates. Another explanation for Black Monday comes from the decline of the dollar, followed by a lack of faith in governmental attempts to stop that decline. In February 1987, leading industrial countries had signed the Louvre Accord, hoping that monetary policy coordination would stabilize international money markets, but doubts about the viability of the accord created a crisis of confidence. The fall may have been accelerated by portfolio insurance hedging (using computer-based models to buy or sell index futures in various stock market conditions) or a self-reinforcing contagion of fear.
The degree to which the stock market crashes spread to the wider (or "real") economy was directly related to the monetary policy each nation pursued in response. The central banks of the United States, West Germany, and Japan provided market liquidity to prevent debt defaults among financial institutions, and the impact on the real economy was relatively limited and short-lived. However, refusal to loosen monetary policy by the Reserve Bank of New Zealand had sharply negative and relatively long-term consequences for both its financial markets and real economy.
During a strong five-year bull market, the Dow Jones Industrial Average (DJIA) rose from 776 in August 1982 to a peak of 2,722 in August 1987. The same bullish trend propelled market indices around the world over this period, as the nineteen largest enjoyed an average rise of 296 percent.
On the morning of Wednesday, October 14, 1987, the United States House Committee on Ways and Means introduced a bill to reduce the tax benefits associated with financing mergers and leveraged buyouts. Unexpectedly high trade deficit figures announced on October 14 by the United States Department of Commerce had a further negative impact on the value of the US dollar while pushing interest rates upward and stock prices downward. As the day continued, the DJIA dropped 95.46 points (3.81 percent) to 2,412.70, and it fell another 57.61 points (2.39 percent) the next day, down over 12 percent from the August 25 all-time high. On Friday, October 16, the DJIA fell 108.35 points (4.6 percent). The drop on the 14th was the earliest significant decline among all countries that would later be affected by Black Monday.
Though the markets were closed for the weekend, significant selling pressure still existed. The computer models of portfolio insurers continued to dictate very large sales. Moreover, some large mutual fund groups had procedures that enabled customers to easily redeem their shares during the weekend at the same prices that existed at the close of market on Friday. The amount of these redemption requests was far greater than the firms' cash reserves, requiring them to make large sales of shares as soon as the market opened on the following Monday. Finally, some traders anticipated these pressures and tried to get ahead of the market by selling early and aggressively on Monday, before the anticipated price drop.
Before the New York Stock Exchange (NYSE) opened on October 19, 1987, there was pent-up pressure to sell. When the market opened, a large imbalance arose between the volume of sell and buy orders, placing downward pressure on prices. Regulations at the time allowed designated market makers (or "specialists") to delay or suspend trading in a stock if the order imbalance exceeded the specialist's ability to fulfill in an orderly manner. The imbalance on October 19 was so large that 95 stocks on the S&P 500 Index (S&P) opened late, as also did 11 of the 30 DJIA stocks. Importantly, however, the futures market opened on time across the board, with heavy selling.
On that Monday, the DJIA fell 508 points (22.6 percent), accompanied by crashes in the futures exchanges and options markets, the largest one-day percentage drop in the history of the DJIA. The DJIA fell from 2,246.74 at the open to 1,738.74 at the close. Significant selling created steep price declines throughout the day, particularly during the last 90 minutes of trading. Deluged with sell orders, many stocks on the NYSE faced trading halts and delays. Of the 2,257 NYSE-listed stocks, there were 195 trading delays and halts that day. Total trading volume was so large that the computer and communications systems were overwhelmed, leaving orders unfilled for an hour or more. Large funds transfers were delayed and the Fedwire and NYSE SuperDot systems shut down for extended periods further compounding traders' confusion.