Black Monday (Stock market crash)
DJIA fell by 508 points
22.6%, the largest percentage drop in one day in history
The stock market crash of 1987 was a rapid and severe downturn in U.S. stock prices that occurred over several days in late October of 1987. While the crash originated in the U.S., the event impacted every other major stock market in the world.
Several events coalesced to create an atmosphere of panic among investors. For example, the trade deficit of the United States widened with respect to other countries. Computerized trading, which was still not the dominant force it is today, was increasingly making its presence felt at several Wall Street firms. Crises, such as a standoff between Kuwait and Iran, which threatened to disrupt oil supplies, also made investors jittery. The role of media as an amplifying factor for these developments has also come in for criticism.
In the five years leading up to the 1987 crash, the Dow Jones Industrial Average (DJIA) had more than tripled. On October 22, 1987–known as Black Monday–the DJIA fell by 508 points, or by 22.6%, the largest percentage drop in one day in history. The crash sparked fears of extended economic instability around the world.
After this crash, the Federal Reserve and stock exchanges intervened by installing mechanisms called "circuit breakers," designed to slow down future plunges and stop trading when stocks fall too far, too fast.
Heightened hostilities in the Persian Gulf, fear of higher interest rates, a five-year bull market without a significant correction, and the introduction of computerized trading have all been named as potential causes of the crash. There were also deeper economic factors that may have been to blame.
Causes
1985, the Federal Reserve agreed with the central banks of the G-5 nations–France, Germany, the United Kingdom, and Japan–to depreciate the U.S. dollar in international currency markets in order to control mounting U.S. trade deficits. By early 1987, that goal had been achieved: the gap between U.S. exports and imports had flattened out, which helped U.S. exporters and contributed to the U.S. stock market boom of the mid-1980s.
In the five years preceding October 1987, the DJIA more than tripled in value, creating excessive valuation levels and an overvalued stock market. The Plaza Accord was replaced by the Louvre Accord in February 1987. Under the Louvre Accord, the G-5 nations agreed to stabilize exchange rates around this new balance of trade.
In the U.S., the Federal Reserve tightened monetary policy under the new Louvre Accord (the Louvre Accord, was signed in 1987 to stop the continuing decline of the dollar) to halt the downward pressure on the dollar in the second and third quarters of 1987 leading up to the crash. As a result of this contractionary monetary policy, growth in the U.S. money supply plummeted by more than half from January to September, interest rates rose, and stock prices began to fall by the end of the third quarter of 1987.
Reasons
Source : Investopedia
DJIA fell by 508 points
22.6%, the largest percentage drop in one day in history
The stock market crash of 1987 was a rapid and severe downturn in U.S. stock prices that occurred over several days in late October of 1987. While the crash originated in the U.S., the event impacted every other major stock market in the world.
Several events coalesced to create an atmosphere of panic among investors. For example, the trade deficit of the United States widened with respect to other countries. Computerized trading, which was still not the dominant force it is today, was increasingly making its presence felt at several Wall Street firms. Crises, such as a standoff between Kuwait and Iran, which threatened to disrupt oil supplies, also made investors jittery. The role of media as an amplifying factor for these developments has also come in for criticism.
In the five years leading up to the 1987 crash, the Dow Jones Industrial Average (DJIA) had more than tripled. On October 22, 1987–known as Black Monday–the DJIA fell by 508 points, or by 22.6%, the largest percentage drop in one day in history. The crash sparked fears of extended economic instability around the world.
After this crash, the Federal Reserve and stock exchanges intervened by installing mechanisms called "circuit breakers," designed to slow down future plunges and stop trading when stocks fall too far, too fast.
Heightened hostilities in the Persian Gulf, fear of higher interest rates, a five-year bull market without a significant correction, and the introduction of computerized trading have all been named as potential causes of the crash. There were also deeper economic factors that may have been to blame.
Causes
1985, the Federal Reserve agreed with the central banks of the G-5 nations–France, Germany, the United Kingdom, and Japan–to depreciate the U.S. dollar in international currency markets in order to control mounting U.S. trade deficits. By early 1987, that goal had been achieved: the gap between U.S. exports and imports had flattened out, which helped U.S. exporters and contributed to the U.S. stock market boom of the mid-1980s.
In the five years preceding October 1987, the DJIA more than tripled in value, creating excessive valuation levels and an overvalued stock market. The Plaza Accord was replaced by the Louvre Accord in February 1987. Under the Louvre Accord, the G-5 nations agreed to stabilize exchange rates around this new balance of trade.
In the U.S., the Federal Reserve tightened monetary policy under the new Louvre Accord (the Louvre Accord, was signed in 1987 to stop the continuing decline of the dollar) to halt the downward pressure on the dollar in the second and third quarters of 1987 leading up to the crash. As a result of this contractionary monetary policy, growth in the U.S. money supply plummeted by more than half from January to September, interest rates rose, and stock prices began to fall by the end of the third quarter of 1987.
Reasons
Program Trading
On that day, in the United States, sell orders piled upon sell orders as the S&P 500 and Dow Jones Industrial Index both shed value of in excess of 20%. There had been talk of the U.S. entering a bear cycle – the bulls had been running since 1982 – but the markets gave very little warning to the then-new Federal Reserve Chairman Alan Greenspan. Greenspan hurried to slash interest rates and called upon banks to flood the system with liquidity. He had expected a drop in the value of the dollar due to an international tiff with the other G7 nations over the dollar's value, but the seemingly worldwide financial meltdown came as an unpleasant surprise that Monday.
Exchanges also were busy trying to lock out program trading orders. The idea of using computer systems to engage in large-scale trading strategies was still relatively new to Wall Street, and the consequences of a system capable of placing thousands of orders during a crash had never been tested. One automated trading strategy that appears to have been at the center of exacerbating the Black Monday crash was portfolio insurance. The strategy is intended to hedge a portfolio of stocks against market risk by short-selling stock index futures. This technique, developed by Mark Rubinstein and Hayne Leland in 1976, was intended to limit the losses a portfolio might experience as stocks decline in price without that portfolio's manager having to sell off those stocks.
These computer programs automatically began to liquidate stocks as certain loss targets were hit, pushing prices lower. To the dismay of the exchanges, program trading led to a domino effect as the falling markets triggered more stop-loss orders. The frantic selling activated yet another round of stop-loss orders, which dragged markets into a downward spiral. Since the same programs also automatically turned off all buying, bids vanished all around the stock market at basically the same time.