October 19, 1987. This was a Monday, and for most people Mondays are the worst day of the week. But this particular Monday was probably the worst day ever for so many traders. That was the day the stock market collapsed in spectacular fashion, and it would be known in history as Black Monday.
Every day starts in the East, obviously, and so that financial day started in Asia as well. Americans were still sleeping soundly in their beds, but a few analysts had already noted the crash of the Hong Kong stock market. And the same thing was happening in Europe as well.
The calamity hit the US especially hard, as investors were “dumping stocks with reckless abandon”, according to an analyst quoted in a Time magazine article. And the results were terrifying.
The Dow Jones Industrial Average dropped 508 points or 22.6% of its total value. That was the biggest percentage drop ever recorded for a single day. That was a loss of more than $500 billion. People who heard about the crash in Wall Street tried to get in contact with their brokers, but they couldn’t because so many calls were pouring in that day.
The NASDAQ was also affected, and recorded its all-time single-day loss at 11.35%. The S&P 500 also lost 30% of its total value. This was a worldwide occurrence, and stock markets in Australia, New Zealand, Singapore, and Mexico were also hit hard. Stock values worldwide dropped down by 17%.
It was so bad that the New York Times the next day alluded to the start of the Great Depression. Their headline read: “Does 1987 Equal 1929?”
Previous to the crash, the stock market was enjoying a bull market for the previous 5 years. So what led to this catastrophe? Several reasons have been proposed, and perhaps several of them contributed to the disaster:
- The market was due for a correction: The growth of the stock market was too fast, so it seemed a correction of the stock prices was inevitable. The value of the Standard & Poor’s 500 Index more than doubled from 1982 to 1986. And in the first 8 months of 1987, the index rose by more than 38%.
- Computerized trading. Some thought that programed trading response of selling stocks as the market fell contributed to the crash.
- Geopolitical concerns. Some investors may also have been already nervous about world affairs that can affect the stock market. Iran was attacking US merchant vessels, while oil prices were collapsing. James Baker also made some public remarks that may have instilled some fears among his European contemporaries, when he disagreed about the strong dollar and foreign exchange rates.
Reagan was derided by many pundits when he described the crash as a “correction”, but time eventually proved him right. The Dow ended up with a gain of 1% for the year, and the S&P also gained 2%–they recovered the loss by the end of the year.