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1987 Stock Market Crash

The 1987 Stock Market Crash, known as Black Monday, occurred on October 19, 1987, when the Dow Jones fell 22.6% in one day, marking the largest single-day percentage drop in U.S. history. Key causes included stock overvaluation, program trading, investor panic, rising interest rates, and global interconnection. The Federal Reserve's prompt response helped restore market confidence, and the Dow recovered its losses within two years, leading to regulatory changes to prevent future crashes.

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25 views2 pages

1987 Stock Market Crash

The 1987 Stock Market Crash, known as Black Monday, occurred on October 19, 1987, when the Dow Jones fell 22.6% in one day, marking the largest single-day percentage drop in U.S. history. Key causes included stock overvaluation, program trading, investor panic, rising interest rates, and global interconnection. The Federal Reserve's prompt response helped restore market confidence, and the Dow recovered its losses within two years, leading to regulatory changes to prevent future crashes.

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Ranzid Prado
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© © All Rights Reserved
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1987 Stock Market Crash — famously known as Black Monday.

Background

• Date: October 19, 1987.

• The early 1980s saw a booming stock market fueled by economic recovery,
deregulation, and a surge in corporate takeovers.

• By mid-1987, stock valuations were stretched — the Dow Jones had risen 44% in
the first 8 months of the year.

• Investors were heavily using portfolio insurance (computer-driven trading


strategies meant to limit losses), but it had a hidden risk.

The Crash

• On Black Monday, the Dow Jones Industrial Average fell 508 points — a 22.6%
drop in one day.
(Still the largest single-day percentage drop in U.S. stock market history.)

• Global markets followed:

o Australia: -41.8% (Oct–Nov 1987)

o Hong Kong: -45.8%

o UK: -26.4%

o Canada: -22.5%

Causes

1. Overvaluation — Stock prices had far outpaced earnings.

2. Program Trading — Computer algorithms automatically sold large volumes of


stock when prices fell, accelerating the crash.

3. Investor Panic — As prices dropped, fear caused even more selling.

4. Rising Interest Rates — Higher bond yields drew money away from stocks.

5. Global Interconnection — Selling spread instantly across borders.


Economic Impact

• Short-term: Market panic, huge paper losses for investors.

• Medium-term: Unlike the Great Depression, the real economy was not severely
damaged.

• GDP growth slowed briefly, but there was no recession.

• Corporate profits remained relatively strong.

Government & Central Bank Response

• The Federal Reserve stepped in quickly to provide liquidity to banks and


reassure markets with the famous line:
“The Federal Reserve, consistent with its responsibilities as the nation’s central
bank, affirmed today its readiness to serve as a source of liquidity to support
the economic and financial system.”

• Market confidence returned within months.

Aftermath

• The Dow Jones recovered all losses within about two years.

• Regulators introduced circuit breakers — rules to temporarily halt trading


during large drops to prevent panic spirals.

• The crash showed the dangers of automated trading without safeguards.

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