@

What Is Black Monday?

In the world of finance, "Black Monday" refers to Monday, 19 October 1987. Black Monday was a fateful day for U.S. equities, led by the Dow Jones Industrial Average (DJIA) and S&P 500 experiencing their largest single day declines in history. For the trading session, the DJIA registered more than a 22% loss in value,[1] and the S&P 500 closed down 20.4%.[2] The rapid sell off in U.S. stocks was the result of many factors and part of a major global correction in equities.

Black Monday has been a storied event in U.S. financial history. Commonly dubbed as "Wall Street's first modern crash," it has been the focus of many books and movies as well as extensive academic study.

Historical Context

Dating to its origins in 1896, the DJIA has represented the performance of elite publicly traded American companies. It is viewed as one of the leading global indices and serves as a barometer for the entire U.S. economy. The DJIA has experienced many crashes over the course of its history, with the severity of Black Monday ranking near the top of the list[3]:

Date Index Point Drop (DJIA) Percentage Decline Event
19 October 1987 -508.00 -22.61% Black Monday
28 October 1929 -38.33 -12.82% Crash of 1929
29 October 1929 -30.57 -11.73% Crash of 1929
26 October 1987 -156.83 -8.04% Black Monday Fallout
16 September 2001 -684.81 -7.13% 9/11 Attack
15 October 2008 -733.08 -7.87% Global Debt Crisis
1 December 2008 -679.95 -7.70% Global Debt Crisis

The size and scope of the losses incurred on Black Monday are staggering. In comparison to modern valuations of the DJIA, the decline on 19 October 1987 equates to a one-day deficit of more than 5,000 index points.[4] By a wide margin, Black Monday remains one of the most severe stock market crashes in U.S. and world history.

International Fallout

The panic created by investors during Black Monday acted as a precursor for disaster in the international markets. For the trading sessions of 19 and 20 October, several leading international equities indices experienced massive losses[2]:

Country Equities Index Percentage Decline
Great Britain FTSE 100 -22.8%
Germany DAX 30 -10.8%
France CAC40 -9.5%
Japan Tokyo Stocks -17.3%
Hong Kong Hong Kong Stocks -11.1%
Australia ASX All-Ordinaries -28.7%
Canada Main Index -18%

While the damage to American equities was extensive, international markets were not given any quarter by traders and investors. Black Monday, also referred to as Black Tuesday depending upon geographic locale, was truly a global phenomenon.

Black Monday: Causes And Effects

The events of 19 October 1987 inspired vigorous debate and study regarding the stability of the existing financial system. Since its occurrence, the root cause of Black Monday has been a hotly debated topic among industry experts, historians and regulatory bodies.

However, several theories that address the reasons for the crash are commonly deemed relevant by the consensus[5]:

  • Electronic Trading: The rise of electronic order entry systems greatly increased the speed at which trade was conducted. Large orders were able to be executed at market in short periods of time, a relatively new capability that contributed to the dramatic sell off.
  • Derivatives: Futures and options index products failed to act in sync with their underlying asset, equities. As equities fell, derivatives fell faster, exacerbating the crash.
  • Challenges In Market Liquidity: Insufficient buyers were active in the market to absorb the massive selling. As a result, the trade of many listed stocks was restricted or terminated, furthering the loss in asset value.
  • U.S. Budget Deficit: Statements made on 14 October by U.S. Treasury Secretary James Baker regarding the need for a "fall" in U.S. dollar valuations preceded a sharp rise in interest rates. Concerns over a coming trade imbalance and growing national debt ensued, prompting many investors to take positions in the bond markets.

Each of these elements is likely to have played an individual role in creating the conditions for a plunge in U.S. equities valuations. While it may not be possible to isolate a single cause, market historians cite Black Monday as being the culmination of a wide variety of factors.

Shortly after the conclusion of Black Monday, the Presidential Task Force on Market Mechanisms, also known as the Brady Commission, was created. The task force investigated the events of Black Monday in-depth, crafting an official report of its findings. The report issued several recommendations designed to limit the impact of future market volatilities and eliminate financial catastrophe[6]:

  • Creation of an intermarket regulatory body
  • Unification of transaction clearing systems
  • Standardisation of margin requirements
  • Implementation of circuit breakers
  • Establishment of connected information systems

Many of the recommendations outlined by the task force have become functioning parts of the U.S. financial system. Circuit breakers, margin requirements and standardised clearing have all been implemented in contemporary finance. In addition, the U.S. Federal Reserve (FED) conducts extensive market oversight acting as the proposed intermarket regulatory body.

Summary

Even though Black Monday was the largest single-session loss in U.S. equities value in history, the market proved resilient. By the end of October 1987, the DJIA was up 15% from the 19th October close. A little more than two years later, the DJIA eclipsed pre-crash levels.[7] While certainly a devastating financial event, Black Monday is given credit for being the beginning of a pronounced bull run in U.S. equities.

The lessons of Black Monday still linger in the background of the modern financial landscape. Since that time, many changes to the markets have been made to ensure crashes occur infrequently. While the stability of U.S. and global equities has not been tested to the degree of Black Monday since October 1987, only time will tell if the safeguards are a success.