Black monday: OCTOBER 20, 1987

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Wall Street has experienced its fair share of market crashes, but as of this date in 1987, they paled in comparison to what would eventually be coined “Black Monday” when the Dow Jones Industrial Average lost over 500 points in a single day. The selling spread around the world as many global exchanges lost as much as 20% in the week following Black Monday.

Although historical volatility events tend to be composed of a myriad of factors, many times, it’s an eventual catalyst that pushes fear over a cliff, in this case, there were a few. In the months approaching mid-October of 1987, expanding trade deficit issues led to speculation that Asian countries may try to limit trade advantages with the states. Also, Congress passed a bill on October 15th that eliminated government-funded corporate takeovers which stoked fears that corporate profits could dry up. The U.S. had also recently intervened in a serious military conflict between Kuwait and Iran. The Dollar weakened in response to the widening trade deficit, causing rates to rise resulting in the Dow Jones losing 4.6% the Friday before Black Monday.

There was also the relatively new concept of all-day media coverage. For the first time, television viewers around the world could watch a market crash in real time on CNN and other local news. They say a picture is worth a thousand words. Televised news viewers saw traders in agony on exchange floors all over the world. The more viewers watched, the more they wanted to sell their investments too. Volatility is often overstated. Perhaps this was the first time live television had exacerbated that fact.

There was also the recent introduction of computerized trading, known as “program trading” by Wall Street Insiders. Black Monday was one of the first crashes where the largest institutional investment firms could execute massive stock orders in rapid response to real-time events like a sharp decline. With enormous sell orders compounding during a period of major chaos, Black Monday only grew more threatening.

The Dow Jones would regain 288 points in the three trading days following Black Monday and would recover all stock market losses by September 1989. Volatility would revert in half that time.

Black Monday Facts

• In 1987, the standard volatility measure was VXO. The VIX was launched in 1993.

• In 49 days, volatility rose 868%, 533% of that occurred on one day, Black Monday.

• Black Monday led to the creation of the “circuit-breaker” to temporarily halt trading in future crashes.

Sources: Bloomberg Finance