Black Monday is the second stock market crash to be examined in our series. While we have become used to market volatility, Black Monday in 1987 remains the granddaddy of them all.

Black Monday

When: October 19, 1987

The amount the market declined from peak to bottom:508.32 points, 22.6%, or $500 billion lost in one day. The largest one-day percentage drop in history.

Black Monday Timeline

In 1986, the United States economy began shifting from a rapidly growing recovery to a slower growing expansion, which resulted in a "soft landing" as the economy slowed and inflation dropped. The stock market advanced significantly, with the Dow peaking in August 1987 at 2722 points, or 44% over the previous year's closing of 1895 points.

On October 14, the DJIA dropped 95.46 points (a then record) to 2412.70, and fell another 58 points the next day, down over 12% from the August 25 all-time high. On Friday, October 16, the DJIA closed down another 108.35 points to close at 2246.74 on record volume. Treasury Secretary James Baker stated concerns about the falling prices. That weekend many investors worried over their stock investments.

The crash began in Far Eastern markets the morning of October 19. 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 U.S. flagged ship MV Sea Isle City.

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Causes of Black Monday

This was the crash that everyone expected but could not justify because of the work of the U.S. Securities and Exchange Commission, which is the governing body President Franklin D. Roosevelt ordered after the depression. The SEC - which was established for the prevention of further crashes and fraudulent practices that had infected the stock market - was doing a fine job after the war and finally coaxed tentative investors back into the market in the sixties.

In early 1987, there was a rash of SEC investigations into insider trading. For the most part, people were aware of the tendency of Wall Street to look out for itself, but the barrage of SEC investigations, rattled investors. By October, investors decided to move out of the crooked game and into the more stable environment offered by bonds or, in some cases, junk bonds.

As people began the mass exodus out of the market, the computer programs began to kick in. The programs put a stop loss on stocks and sent a sell order to DOT (designated order turnaround), the NYSE computer system. The instantaneous transmission of so many sell orders overwhelmed the printers for DOT and caused the whole market system to lag, leaving investors on every level (institutional to individual) effectively blind.

A Wall Street Veteran Remembers Black Monday

Robert Hormats, a managing director and vice-chairman of Goldman Sachs International, was working in the investment banking arm of Goldman at the time. He remembers the day well.

Hormats said, "I was stunned. It was almost surreal. It was so rapid. It hit you all at once. I equate to a category five hurricane. We didn't have these Bloomberg computers on our desks as do do now and we had to go out and watch TV and other things.

I remember I was on Peter Jennings show that day or the next with Chuck Schwab. I said it's not the Great Depression.
No one at the time thought there wouldn't be a lasting impact. The prism people were looking through was the crash of ‘29. It was a serious collapse of the wealth effect - not so much that of the economy. It wasn't like the current thing. It wasn't an over-leveraged economy."

Could Black Monday Happen again?

If history is any indication, we will continue to have major market fluctuations as we move forward into the future. However, with all of the trading stops, curbs, and preventative measures in place today, it is unlikely that we would have a drop of that magnitude in a single day. However, while not quite as sudden, the nearly 50% drop of the Dow Jones in a little bit over a year was a much greater loss. More than likely a prolonged crash is the new reality.