3. Introduction
• In finance, Black Monday refers to Monday,
October 19, 1987, when stock markets around
the world crashed, shedding a huge value in a
very short time. The crash began in Hong Kong
and spread west to Europe, hitting the United
States after other markets had already declined
by a significant margin. The Dow Jones Industrial
Average (DJIA) fell exactly 508 points to 1,738.74
(22.61%).In Australia and New Zealand, the 1987
crash is also referred to as "Black Tuesday"
because of the time zone difference.
4. How the Stock Market Crash of 1987
Began
• During this growth boom, the SEC found it increasingly difficult to prevent
shady IPOs and conglomerates from proliferating. In early 1987, the SEC
conducted numerous investigations of illegal insider trading, which
created a wary stance among many investors. At the same time, inflation
and overheating became a concern due to the high rate of economic and
credit growth. The Federal Reserve rapidly raised short term interest rates
to temper inflation, which dampened some of stock investors’ enthusiasm.
Many institutional trading firms began to utilize portfolio insurance to
protect against further stock dips. Portfolio insurance is a hedging strategy
that uses stock index futures to cushion equity portfolios against broad
stock market declines. As interest rates rose, many institutional money
managers scrambled to hedge their portfolios at the same time. On
October 19th 1987, the stock index futures market was flooded with
billions of dollars worth of sell orders within minutes, causing both the
futures and stock markets to crash. In addition, many common stock
investors attempted to sell simultaneously, which completely
overwhelmed the stock market.
5. • On October 19th 1987, $500 billion in market capitalization was
evaporated from the Dow Jones stock index. Markets in nearly
every country around the world plunged in a similar fashion. When
individual investors heard that a massive stock market crash was
occurring, they rushed to call their brokers to sell their stocks. This
was unsuccessful because each broker had many clients. Many
people lost millions of dollars instantly. There are stories of some
unstable individuals who had lost large amounts of money who
went to their broker’s office with a gun and started shooting. A few
brokers were killed despite the fact that they had no control over
the market action. The majority of investors who were selling did
not even know why they were selling except for the fact that
“everyone else was selling.” This emotionally-charged behavior is
one of the main reasons that the stock market crashed so
dramatically. After the October 19th plunge, many futures and
stock exchanges were shut down for a day.
6. • Shortly after the crash, the Federal Reserve decided to intervene to
prevent an even greater crisis. Short-term interest rates were
instantly lowered to prevent a recession and banking crisis.
Remarkably, the markets recovered fairly quickly from the worst
one day stock market crash. Unlike after the stock market crash of
1929, the stock market quickly embarked on a bull run after the
October crash. The post-crash bull market was driven by companies
that bought back their stocks that that the considered to be
undervalued after the market meltdown. Another reason why
stocks continued to rise after the crash was that the Japanese
economy and stock market was embarking on its own massive bull
market, which helped to pull the U.S. stock market to previously-
unforeseen heights. After the 1987 stock market crash, as system of
circuit breakers were put into place to electronically halt stocks
from trading if they plummet too quickly.
7. Market effects
• By the end of October, stock markets in Hong Kong, Australia, Spain, the United Kingdom, the
United States and Canada had fallen 45.5%, 41.8%, 31%, 26.45%, 22.68% and 22.5%
respectively. New Zealand's market was hit especially hard, falling about 60% from its 1987
peak, and taking several years to recover. A summary of the effects of the crash in New
Zealand was summarized in a book written by Olly Newland "Lost Property" giving his
experiences during that troubled time.
• The Black Monday decline was—and currently remains—the largest one-day percentage
decline in the DJIA. (Saturday, December 12, 1914, is sometimes erroneously cited as the
largest one-day percentage decline of the DJIA. In reality, the ostensible decline of 24.39%
was created retroactively by a redefinition of the DJIA in 1916.)
• Following the stock market crash, a group of 33 eminent economists from various nations
met in Washington, D.C. in December 1987, and collectively predicted that "the next few
years could be the most troubled since the 1930s". However, the economy was barely
affected and growth actually increased throughout 1987 and 1988, with the DJIA regaining its
pre-crash closing high of 2,722 points in early 1989.
• However the rapid rebound of the stock market largely depended on the S&L business, which
was already under scrutiny before its mid-1989 collapse, sending the economy to a "hard
landing" phase late that summer. This, along with the abrupt demise of the leveraged buyout
craze (which led to the Friday the 13th mini-crash) brought a five-year depression late that
year.
8. As a result
• The day after the crash, markets around the
world were put on restricted - or limited - trading
status. • The world economy slowed down. • The
U.S. Fed cut down the interest rates. • System of
circuit breakers were introduced to automatically
halt the prices if dropping rapidly. • Companies
bought back their own shares which were under-
valued after the meltdown. • The recovery was
aided by an unexpectedly strong performance by
the Nikkei Index in Japan, which helped boost
markets around the world.
9. Could it happen
• It took almost two to three years for the
market to recover. • With the implementation
of circuits, the probability of occurrence of a
similar event is low. • However, the market is
will always carry a certain degree of risk.
10. Conclusion
• The 1987 stock market crash was a shock to the stability of
the financial system, not just because of the size of the
drop in price, but importantly because market functioning
was significantly impaired. The volume of sell orders at
times overwhelmed NYSE specialists and they were forced
to suspend trading in some stocks. Stock trading suspension
played a role in temporarily halting trading in some option
and futures contracts on other exchanges. Difficulties
ensuring the necessary credit extensions and payment
flows to settle margin accounts caused concern about the
clearinghouse operations. The issues raised by the crash
helped spur upgrades of facilities and systems by the
exchanges and clearinghouses.