Events

1987 Stock Market Crash
10/19/1987
10/19/1987
10/19/1987

Black Monday is a nickname for the US stock market crash that happened in 1987

  • First contemporary global financial crisis
  • Global stock markets plunged in a matter of hours
  • Chain Reaction hit global markets
    • Demonstration of how "globalized" the world has become
  • DJIA dropped 22.6% in a single session (largest in history)
  • Marked the start of a longer down-turn in the United States
  • Was a true panic - traders ran to the pits to sell
  • Was limited to stock markets
    • Did not result in an economic recession
    • Did not spread into a banking crisis
    • Potentially thanks to Fed Intervention
  • 57% of losses were regained in 2 trading sessions
  • Markets hit new highs within 2 years


Federal Reserve Response to Black Monday

  • The Fed Affirmed it's readiness as a source of liquidity to support the economic & financial system
  • The Fed encouraged banks to continue lending (otherwise the crash could have spread to the broader economy)

Reforms Based off Black Monday Crash

  • Exchanges implemented rules to temporarily pause trading after rapid sell-offs (circuit breakers)
  • Federal Reserve's use of liquidity to help the crisis set a precedent for future crisis
    • Started new era of confidence that Fed can stop market downturns
    • Some consider this to be a negative - has set up  a manipulated market (if people think the fed will save it)


Black Monday History

  • Stock markets were up in the first half of 1987
  • Concerns of bubble by late August (DJIA up 44% in 7 months)
  • Mid October market volatility from news reports (larger trade deficit)
  • Markets Began to sell off
  • October 16th Triple Witching (DJIA down 4.6%)
  • Monday October 19th
    • Asian stock markets started selling in the AM
    • NZ Markets dropped 60%
    • DJIA fell 22.6%


Potential Black Monday Causes

  • Inflow of international investors to US markets (causing rapid rise and thus rapid fall)
  • Use of "Portfolio Insurance" - accelerated crash pace
  • Mismatched timelines for settlement of different trade types may have forced additional selling
  • Federal Reserve Increasing Interest Rates:
    • The Fed started to tighten in February 1987, sending rates up
    • The Fed continued to tighten until Black Monday (markets crashed)