Post No. 18. Black Monday (1987)
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. The terms Black Monday and Black Tuesday are also respectively applied to October 28 and October 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929.

On October 14, the DJIA dropped 95.46 points (3.8%) (a then record) to 2,412.70, and fell another 58 points (2.4%) the next day, down over 12% from the August 25 all-time high.

On October 15, 1987, Iran hit the American-owned ( and Liberian-flagged) supertanker, the Sungari, with a Silkworm missile off Kuwait’s main Mina Al Ahmadi oil port. The next morning, Iran hit another ship, the U.S.- flagged MV Sea Isle City, with another Silworm missile.

On October 16, when all the markets in London were unexpectedly closed due to the Great Storm of 1987( a violent extratropical cyclone that occurred on the night of 15-16 October, with hurricane- force winds causing casualties in England, France and the Channel Islands. Among the most damaged areas were Greater London, the East Anglian coast, the Home Counties, the west of Brittany and the Cotentin Peninsula of Normandy), the DJIA fell 108.35 points (4.6%) to close at 2,246.74 on record volume. Then- Treasury Security James Baker stated concerns about the falling prices.

The crash began in Far Eastern markets the morning of October 19, but accelerated in London time- largely because London had closed early on October 16 due to the storm- by 9:30 am the London FTSE100 had fallen over 136 points. Later that morning, two U.S. warships shelled an Iranian oil platform in the Persian Gulf in response to Iran’s Silkworm missile attack on the Sea Isle City.

By the end of October, stock markets had fallen in Hong Kong (45.5%), Australia (41.8 %), Spain (31%), the United Kingdom (26.4%), the United States (22.68%) and Canada (22.5%). New Zealand’s market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover.

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.

Possible causes for the decline included program trading, overvaluation, illiquidity and market psychology.

Program trading is a type of trading in securities, usually consisting of baskets of fifteen stocks or more that are executed by a computer program simultaneously based on predetermined conditions. Program trading is often used by hedge funds and other institutional investors pursuing index arbitrage or other arbitrage strategies.

Overvaluation is a situation in which a security has too high a price. This means that the technical indicators on the security do not justify its current price. (The Free Dictionary by Farlex)

On investment, market liquidity is a market’s ability to purchase or sell an asset without causing drastic change in the asset’s price.

Market psychology is the overall feeling among market participants that impels them to buy or sell. For this reason, an upward-or bullish-trend is associated with feelings of positive expectations expressed by optimism and hopefulness.

A popular explanation for the 1987 crash was selling by program traders, most notable as a reaction to the computerized selling required by portfolio insurance hedges. However, economist Dean Furbush points out that the biggest price drops, occurred when trading volume was light. In program trading, computers perform rapid stock executions based on external inputs, such as the price of related securities. 

 Common strategies implemented by program trading involve an attempt to engage in arbitrage ( practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices) and portfolio insurance strategies ( portfolio insurance is a method of hedging a portfolio of stocks against the market risk by short selling stock index futures.). 

 As computer technology became more available, the use of program trading grew dramatically within Wall Street firms. After the crash, many blamed program trading, and that the crash was merely a return to normalcy return to the way of life before World War I). Either way, program trading ended up taking the majority of the blame in the public eye for the 1987 stock market crash. U.S. Congressman Edward J. Markey, who had been warning about the possibility of a crash, stated that “Program trading was the principal cause.”

New York University’s Richard Sylla divides the causes into macroeconomic and internal reasons. Macroeconomic causes included international disputes about foreign exchange and interest rates, and fears about inflation.

After Black Monday, regulators overhauled trade-clearing protocols to bring uniformity to all prominent market products. They also developed new rules, known as “trading curbs” or colloquially as circuit breakers, allowing exchanges to temporarily halt trading in instances of exceptionally large price declines in some indexes; for instance, the DJIA.

References:

Black Monday Documentary. Time: 43:09:
https://www.youtube.com/watch?v=eI7U9ZucMsY

What Caused the October 1987 Stock Market Decline” (1988). Time: 1:35:56:
https://www.youtube.com/watch?v=QWy-yYQSMtg

Michael Lewis on the Crash of 1987. Time: 6:31:
https://www.youtube.com/watch?v=KFa4-SRIhIM

Market crash of 1987 Listen carefully. Time: 10:40:
https://www.youtube.com/watch?v=5PUwr8DsYeg

What Caused the October 1987 Stock Market Decline? (1988). Time: 1:53:56:
https://www.youtube.com/watch?v=QWy-yYQSMtg&t=11s

The Stock Market Crash of 1987 I Cancel Crash. Time: 43:18:
https://www.youtube.com/watch?v=jLfjEMDJubg

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