Stock Markets have always been as unpredictable as the weather- sometimes crashing, sometimes flourishing. In fact, that is the whole point of investing in the shares market- it’s all heavily based on speculation. However, one of the biggest stock market crashes this world has ever seen in centuries is the 1987 Black Monday crash, which shook the whole world and the very core of Wall Street.
THE CRASH: It was a fine day on October 19th in the year 1987 when the whole world saw the Dow Jones Industrial Average (DJIA) took a fall of 22.6%, an even bigger crash than the Black Monday of 1929 which saw a fall of 13%. It didn’t happen all that once; initially, the US stock market took a plunge, leading up to many countries facing the same crisis soon after. This was what everyone described as “the worst one-day percentage loss in the history”. Panic ensued, everyone came under scrutiny and the crash worsened minute by minute as the Dow stood at 1,738.74, down by 508 points.
THE CAUSE: There’s no single factor responsible for this situation- there were a variety of reasons, some of which had been allowed to continue without any corrective action much before the Black Monday happened. For instance, the market had been bullish for a considerable time of 5 years before all hell broke loose, with the prices rising by a whopping 44% in 1987 itself. Another major culprit was found to be computerized or “program” trading- a new innovation in the stock market wherein buying and selling of shares were generated automatically by computers. This was a very fast and efficient process but it backfired on the day of Black Monday since this system accelerated the trading of shares at the dropped-down prices continually. Another significant factor among tension with Persian gulf and other economic factors was portfolio insurance which just like computerized trading created a domino effect wherein investors who indulged in short selling S&P 500 futures contracts.
THE EFFECTS: The crash had international implications, with it starting from Hong Kong, spreading throughout other parts of Asia and then finally reaching the United States. Several markets worldwide took a massive hit and some saw huge losses too. Transactions went through long delays and some systems had to be shut down. Many people suspected that this would lead to a Great Depression-like situation, well the stock markets worldwide did take nearly 20 years to fully recover from this harrowing event however Dow Jones regained all the 288 points within a few days of the Black Monday, thus marking a great come-back. Contrary to public expectations again, the US economy saw no recessions, owing to the quick Federal Reserve intervention in terms of interest rate cuts. Perhaps the greatest step taken was of the implementation of “circuit breakers” – a means to halt trading on a temporary basis when stock prices decline by a high percentage. It’s popularly believed that public panic is one of the biggest reasons for this stock market crash and with the objective of preventing such an event in the future, circuit breakers were developed. They help prevent reckless selling on part of investors by providing them with enough time to evaluate and decide accordingly. This system did work in favor of all as the panic was largely controlled in future crises.
The stock markets are not as simple as they look; some hurdles are likely to occur now and then. Over the years, learning from past hiccups, investors and the public both have learned how to cope with crises related to stock markets. New and efficient systems have been developed in light of the need for precautionary measures in such scenarios. Black Monday has had a huge impact on many countries worldwide; it’s still difficult to blame one factor for the whole thing. Nonetheless, the past is in the past and I’m sure that in the world of stock markets, most people try their best to not let such a thing happen again.