Technical analysisTrading concept
Black Monday 1987: The Crash in a Chart, a Timeline and Its Causes
October 19, 1987 on the daily S&P 500 index chart with its 200-day average, the dated timeline from the August top to the 1989 recovery, the causes named by the Federal Reserve, and what changed in market rules afterward.
On this page
Black Monday is the stock market crash of Monday, October 19, 1987. That day the Dow Jones Industrial Average fell 508 points, or 22.6 percent, which is still its largest one-day percentage fall. The broader S&P 500 index lost about 20.5 percent. The crash came after a rise of 44 percent in the Dow in about seven months and a week of heavy selling. The chart below shows the S&P 500 index from March 1987 to February 1988 with its 200-day simple moving average, so you can see where the drop sits in the trend.
S&P 500 index around Black Monday, with its 200-day average
- Price, daily candles (hollow up, filled down)
- SMA(200) of the close (solid line)
What happened on October 19, 1987
The selling had started before Monday. In the week of October 12 the S&P 500 index fell more than 9 percent, and on Friday, October 16, the Dow lost 108.35 points, or 4.6 percent. Over the weekend, sell orders piled up. On Monday many stocks could not open on time: the Wall Street Journal reported that 11 of the 30 Dow stocks opened late, so the indexes were computed partly on stale quotes while the futures market in Chicago opened on time with heavy selling.
By the close, the Dow stood at 1,738.74, down 508 points. The S&P 500 index closed at 224.84, against 282.70 on Friday. The S&P 500 futures contract fell about 29 percent, more than the stocks themselves, according to the SEC report quoted by the Federal Reserve. The Brady Report, by the Presidential Task Force on Market Mechanisms, put the fall of the Dow, the S&P 500 and the Wilshire 5000 between 18 and 23 percent that day, depending on the measure.
Timeline of the 1987 crash
The 1987 crash, dated
By late August the Dow has gained 44 percent in about seven months, stoking fears of a bubble. Federal Reserve History
The S&P 500 index closes at 336.77, its high of 1987. The Christian Science Monitor, August 14, 1989
Week of October 12: the S&P 500 index falls more than 9 percent over the week. Federal Reserve working paper
Friday: the Dow falls 108.35 points, or 4.6 percent, then a record one-day drop in points. Federal Reserve History
Black Monday: the Dow falls 508 points, 22.61 percent, to 1,738.74. Guinness World Records
The S&P 500 index falls about 20 percent, and S&P 500 futures 29 percent. Federal Reserve working paper
Before the open, the Federal Reserve says it is ready to serve as a source of liquidity. The federal funds rate falls from above 7.5 percent to about 7 percent. Federal Reserve working paper
After two sessions the Dow has regained 288 points, 57 percent of the Black Monday loss. Federal Reserve History
The NYSE puts in place its first circuit breaker, Rule 80B. Chicago Fed Letter
A market column notes that the S&P 500 index has already broken its August 1987 high. The Christian Science Monitor, August 14, 1989
Who came to the rescue
The Federal Reserve, chaired by Alan Greenspan. Before the market opened on Tuesday, October 20, it issued a one-sentence statement: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” It then added reserves through open market operations, and the federal funds rate fell from above 7.5 percent on Monday to about 7 percent on Tuesday. Banks kept lending to securities firms so they could meet their margin calls: the 10 largest New York banks nearly doubled their lending to securities firms during the week of October 19.
The rebound was fast but did not undo the crash at once. The Dow regained 288 points over the next two days. The S&P 500 index then fell back, and its lowest close came in early December. The full recovery took the S&P 500 index until July 1989, close to two years after its August 1987 top.
The causes of the stock market crash of 1987
The inquiries of the time did not settle on one cause. The Chicago Mercantile Exchange’s report, quoted by Carlson, found that portfolio insurance “was only one of many sources of selling, and does not by itself explain the magnitude of the crash”. The causes most cited by the Federal Reserve accounts are these.
| Cause | What happened |
|---|---|
| A fast rise and a less certain outlook | The Dow had gained 44 percent in seven months, which raised fears of a bubble. Interest rates were rising around the world, and a growing U.S. trade deficit and a falling dollar fed worries about inflation and higher rates. |
| Portfolio insurance | Many large funds used a strategy that sold stock index futures as prices fell, to limit losses on their stock holdings. In a falling market, these rules all pointed the same way and added sell orders as prices dropped. |
| Program trading and index arbitrage | Computers sent large baskets of orders to trade the gap between futures prices and stock prices. When the stock market could not keep up on October 19, futures traded at a deep discount, and that discount fed more selling in stocks. |
| Market plumbing | Stock, options and futures markets cleared and settled trades on different timelines, and record margin calls meant that many firms needed cash at the same time. Delayed openings and overloaded order systems left prices uncertain for much of the day. |
The portfolio insurance selling loop of Black Monday
The way portfolio insurance turns a fall into more selling is an extreme case of what stop loss orders do in a thin market, and it explains why price can jump through levels that look like solid support on a chart.
What changed after Black Monday
In October 1987 the NYSE had no circuit breakers. They were introduced a year later and have been changed several times since.
| Period | Market-wide halt rule |
|---|---|
| October 1987 | None: trading went on all day while prices fell. |
| From October 1988 (NYSE Rule 80B) | Trading stops for one hour after a fall of 250 Dow points and for two hours after a fall of 400 points. |
| Today | Halts at falls of 7, 13 and 20 percent in the S&P 500, calculated each day from the prior day’s close of the index. |
What traders can learn from 1987
- A trend filter warns late, not early. The S&P 500 index crossed below its 200-day average only two sessions before a one-day fall of about 20 percent, after the index had already lost about 11.5 percent from its August high (298.08 against 336.77, computed on the closes of the chart). A moving average describes the trend; it does not forecast a crash.
- Gaps and halts break stops. When stocks do not open, a stop order is filled at the first price available, which can be far from the stop level.
- Leverage decides who survives. A fall of 20 percent in one day is a total loss for a position with five times leverage before any margin call can be met.
- A crash is not always the end of the bull market. The low of December 1987 held, and the index went on to new highs in 1989. Whether a sharp drop starts a lasting decline is a question for the bull and bear market trend, which the drop alone does not answer.
For other ways to read a market in trouble, see the dead cat bounce, a short rebound inside a falling market, and the guides on Dow theory and technical analysis.
Frequently asked questions
What happened in the 1987 market crash?
On Monday, October 19, 1987, U.S. stocks fell faster than ever in a single day. The Dow Jones Industrial Average lost 508 points, or 22.6 percent, and the S&P 500 index about 20.5 percent. Portfolio insurance and program trading added sell orders as prices fell, many stocks opened late, and the Federal Reserve promised liquidity the next morning.
How much did the Dow drop on Black Monday?
508 points, from about 2,247 to 1,738.74, a fall of 22.6 percent. Guinness World Records lists it as the largest percentage fall of the Dow Jones Industrial Average in one day, at 22.61 percent.
What are the worst days in stock market history?
By percentage, October 19, 1987 is the worst day of the Dow Jones Industrial Average, with a fall of 22.61 percent according to Guinness World Records. A fall in points says less, because the same number of points is a much smaller share of the index at today’s levels.
How long did it take the market to recover from the 1987 crash?
The Dow regained 57 percent of the Black Monday loss in the next two sessions, but the full recovery took longer. The S&P 500 index first closed above its August 25, 1987 high of 336.77 on July 26, 1989, and the Federal Reserve history essay says markets passed their pre-crash highs in less than two years.
Could Black Monday happen again?
A fall of the same size in one session would now be stopped by the market-wide circuit breakers, which halt trading at falls of 7, 13 and 20 percent in the S&P 500. Halts slow a crash down; they do not prevent large falls over several days.
Sources
- Federal Reserve History, Stock Market Crash of 1987 (Mitchell Bernhardt and Marc Eckblad)
- Mark Carlson, A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response, Finance and Economics Discussion Series 2007-13, Federal Reserve Board
- Chicago Fed Letter, July 1998, on circuit breakers and Rule 80B
- Guinness World Records, largest percentage fall on the Dow Jones Industrial Average in one day
- Investor.gov (SEC), Investor Bulletin: measures to address market volatility (market-wide circuit breakers)
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