- In October 1987, stock markets were booming and enjoying a bull run of five years.
- The stock market crash of 1987 was so much catastrophic that it caused Dow Jones’s 1987 chart to fell all of a sudden.
- The Dow chart 1987 faced the worst fall of history by 22.6%. The S&P 500 fell by 20% and future markets dipped by 29%.
- And, the stock markets from all over the had to suffer fall between 20% to 40%. The result was the loss of $1.7 trillion worldwide.
Monday, October 19th, 1987, was a horrible day for the world’s economy. Within the time span of 24 hours, stock markets in Asia, Europe, and the US suffered plummet. That day was a black day and is known as Black Monday in the books of history. It was indeed Black Monday because it was the worst stock market disaster in history. It was so disastrous that the world forgot about the Wall Street Crash of October 28, 1929.
Stock markets suffered a decline of up to 23%. The Dow Jones 1987 charts fell by 22.6% in the US. That was almost double, 12.8% fall of Dow charts of 1929. 34 years have elapsed since but there are many questions that still remained to be answered.
What actually happened on Black Monday of October 1987?
In October 1987, stock markets were booming and enjoying a bull run of five years. The global economy was flying after recovering from the recession. No one knew that a horrible day was hovering around and was ready to strike as hard as possible. Finally, the day came with all its darkness and stock prices began to crumble with no obvious reason why. All the market participants across the globe were just spectators and could do nothing about it.
As Black Monday’s sun begins to travel, more panic begins to settle in. Everyone was trying to limit losses and thus a herd behavior led traders and institutions to react to price movements. This herd behavior only made the situation worse as the fall of stock prices became more drastic. There was the rule of selling orders and trade order updates got more and more slow and unreliable. All the market participants acted impulsively and irrationally.
When all was done and dusted, the Dow chart 1987 faced the worst fall of history by 22.6%. The S&P 500 fell by 20% and future markets dipped by 29%. And, the stock markets from all over the had to suffer fall between 20% to 40%. The result was the loss of $1.7 trillion worldwide. It is hard to believe now but it did happen. The Black Monday of October 1987 is a great learning tool for the world to try to mitigate the impact of such sudden economic falls.
Who came to the rescue?
The stock market crash of 1987 was so much catastrophic that it caused Dow Jones’s 1987 chart to fell all of a sudden. 1987 stock market crash charts were so horrible to have a look at that the Federal Reserve had to act quickly. First of all, it publicly announced that it would support the liquidity of the market. Then it went on to drop the federal fund rate to 7 from 7.5% and also lowered other short-term interest rates. Those steps proved crucial to extend liquidity.
The Federal Reserve also encouraged banks and other borrowers to operate in cooperation. It also advised working more freely than usual with their clients, particularly all stockbrokers and dealers who were severely affected by the stock market crash of 1987. Fortunately, the swift and immediate steps of the Federal Reserve, also the financial backing, proved extremely helpful in recovering stock markets in a few coming weeks.
The causes of the stock market crash of 1987
No one, not even the gurus of the stock market, knows what were the exact causes of the stock market crash of 1987. Not a single theorist has ever claimed to answer the mystery of why did Dow Jones 1987 chart fell in less than 24 hours. However, there are a few probable causes that led to the biggest stock market crisis in living memory.
A long bull trend overdue for a correction
As we have discussed earlier the stock market was flying and that strong bull trend in the market was overdue for a big correction. The stock market never experienced a single corrective retracement since the beginning of the bullish trend in 1982. Stock prices were going higher and higher, rose by 40% in the year of crisis alone. Some theorists believe that such a long bullish trend was the cause of Black Monday as it was due for a correction.
Programed or computerized trading is another cause of the crisis according to some theorists. The use of computerized trading enabled brokers to trade in bulk orders and quickly. Software programs were designed to trade automatically according to predefined stop-loss levels. On Black Monday, as the prices begin to hit stop-loss levels, computer software began to sell out positions. Thus, the pace of selling continued to accelerate and caused prices to continue to fall.
Portfolio insurance was a relatively new phenomenon in 1987. It was the practice of hedging stock portfolios by taking short positions. The portfolio insurance strategies were adopted by large institutional investors. They had a strategy to increase short positions on futures automatically if stock prices declined.
On Black Monday, what was happened in computerized trading also happened here. Large investors began to sell short S&P 500 futures as the stock prices began to fall. Futures selling put extra selling pressure on stock markets and this chain of related pressures led to unimaginable crises all across the world.
The Black Monday crisis was different from the crash of 1929 and the most recent 2008 crisis. It was very brief and short-lived. 1987 Dow chart suffered a loss of 508 points and soon recovered 288 points within just a few weeks. Until 1989, the stock market had recovered all the losses and a new bull trend began.
There are many factors that combined to lead to the stock market crisis of 1987. However, the exact reason for the sudden downfall of the stock market, 1987 stock market charts, and 1987 Dow charts are unclear. However, there a lot of lessons to be learned. The phenomenon of “circuit breakers” was soon introduced. Its purpose was to avoid panic in the market because of which traders impulsively and irrationally began to sell their stocks. Circuit breakers will give traders a break to be calm and make rational well informed decisions. Finally, we may not know exactly what happened on Black Monday but we have covered quite a distance now and have taken some precautions to avoid such situations in the future.