What Caused Black Monday in 1987? Know Its Effects

“Black Monday” took place on October 19 (Monday) in 1987. On this day, stock markets around the world crashed, though the event didn’t happen all at once. Black Monday saw the biggest one-day percentage drop in U.S. stock market history. What Caused Black Monday in 1987? Know Its Effects by reading below

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Black Monday: A Day of Crash

In the United States, the stock market plummeted by more than 20% on October 19, 1987, but the effects of the Black Monday crash varied wildly from country to country. Hong Kong, Singapore, and Australia were hit especially hard, with falls of more than 40%, while Austria scraped by with only an 11.4% decline.

This led to a correspondingly variable response to the crash, depending on just how much of a hit the country in question had taken. For example, the central banks of the United States, Japan, and Germany took bold steps to help their economies recover, while the Reserve Bank of New Zealand, whose stock market had only seen a 15% drop on Black Monday (or Black Tuesday, in their time zone), opted not to relax their monetary policies. As a result, by February, their market had lost more than half of its value, and the crash ended up contributing greatly to the ensuing six-year recession in New Zealand.

With stock prices around the world in a free fall, the worldwide losses from Black Monday were staggering.

How Did Black Monday Actually Happen?

Some imminent warning signs for investors were evident in the trading days just prior to what would turn out to be the Black Monday. On October 14, the Dow experienced a major decline of nearly 4%. It dropped another 2.5% the following day.

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And the day after that, October 16, the Friday before Black Monday, saw a devastating 5% loss in London stock markets that, ominously, coincided with the Great Storm of 1987, an unprecedented severe weather phenomenon that produced hurricane-force winds in the English Channel and resulted in nearly two dozen fatalities.

On Monday morning, the crash started in Hong Kong. The crash continued throughout all of Asia and all during the Asian trading session, as other markets began to feel the “aftershocks” of the initial crash. The market carnage continued, spreading throughout Europe when the London market session opened.

By the time the stock markets in U.S. opened, stocks were virtually in freefall. By the end of the day, the DJIA had dropped by more than 500 points and the S&P 500 by more than 55 points.

What Caused The Black Monday Crash? Theoretical conspiracy

In the years following Black Monday, conspiracy theories have popped up to explain the mysterious failure of the complicated market. The most widespread theory suggests that a small, elite group controls the global economy through some vague combination of wealth and witchcraft. It has been claimed that, when trade slowed on Black Monday, the members of this elite mystery group manipulated the numbers behind the scenes to make it look like the market was on the rise when it wasn’t.

Some conspiracy theorists have connected Black Monday to the Iran-Contra affair, in which the U.S. was busted selling weapons to Iran and using the funds to support Nicaraguan contras, because hearings related to the event began just before the crash.

Although the Secret Global Supervillains theory is the most popular, it’s far from the only one. Others believe that the Great Storm of 1987, which did blow down more than 15 million trees in England and flood the timber market, blew down the stock market .

What is the genuine reason that caused the Black Monday Crash?

Unfortunately, the factors economists cite to explain Black Monday are more mundane. According to them, it was primarily the newly instituted portfolio insurance and the computer trading models that controlled it that sparked investor panic.

1. Computerized or “program” trading

The other culprit pinpointed as contributing to the severe crash was computerized trading. Computer, or “program trading,” was still relatively new to the markets in the mid-1980s. The use of computers enabled brokers to place larger orders and implement trades more quickly. In addition, the software programs developed by banks, brokerages, and other firms were set to automatically execute stop-loss orders, selling out positions, if stocks dropped by a certain percentage.

On Black Monday, the computerized trading systems created a domino effect, continually accelerating the pace of selling as the market dropped, thus causing it to drop even further. The avalanche of selling that was triggered by the initial losses resulted in stock prices dropping even further, which in turn triggered more rounds of computer-driven selling.

2. A bull market due for a correction

Many market analysts theorize that the Black Monday crash of 1987 was largely driven simply by a strong bull market that was overdue for a major correction. 1987 marked the fifth year of a major bull market that had not experienced a single major corrective retracement of prices since its inception in 1982. Stock prices had more than tripled in value in the previous four and a half years, rising by 44% in 1987 alone, prior to the Black Monday crash.

3. Portfolio insurance

A third factor in the crash was “portfolio insurance,” which, like computerized trading, was a relatively new phenomenon at the time. Portfolio insurance involved large institutional investors partially hedging their stock portfolios by taking short positions in S&P 500 futures. The portfolio insurance strategies were designed to automatically increase their short futures positions if there was a significant decline in stock prices.

Portfolio insurance was designed to protect a portfolio against market risks by using short-sale stock index futures to maintain a balance, but in the late ’80s, stock trading was still done the old-fashioned way.

Concerns about oil prices, interest rates, inflation, and trade deficits created warning signs of increased volatility and some occasional severe down days in the market prior to Black Monday in October. However, in the end, the most likely cause of the 1987 crash was just the fact that markets did not just move straight up indefinitely.

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