Where Were You On Black Monday?

Black Monday Really Did Look Like 1929 Again
The 1987 market crash seemed like a disaster. It wasn’t.
Bloomberg, October 19, 2015




Where were you on Monday, Oct. 19, 1987?

Today is the first time since 2009 that October 19 has fallen on a Monday, and that has me thinking about that day. I recall exactly where I was — in graduate school, walking between classes, when I passed a television broadcasting the collapse.

For you youngsters, that is the day better known as Black Monday, when the stock market plunged 508 points in a single session. The Dow Jones Industrial Average lost 22.6 percent, the worst daily percentage loss on record, closing at 1,738.74.

The New York Times front page headline the next day asked, “Does 1987 Equal 1929?

Anyone working on Wall Street today who is under 40 is unlikely to have any professional memories of the event. To you, I suggest reading “Black Monday: The Stock Market Catastrophe of October 19, 1987” by Tim Metz. It is the definitive account of the crash, including the key players, personalities, decisions, news flows and first-hand accounts of what happened that day.

As in most complex matters, there were many forces that drove the events leading up to the crash. But some stand out more than others. Here are two of the biggest:

Bull market froth: The Dow industrials kissed 1,000 in 1966, then tumbled in the horrific bear market of the 1970s and didn’t surpass that number on a permanent basis until 16 years later in 1982. Then, between 1982 and 1986, the Standard & Poor’s 500 Index more than doubled. But things really heated up in 1987. In the first eight months of the year the index gained more than 38 percent. A correction was overdue. While many people were afraid that markets were overheated, no one — no one — had envisioned a one-day drop that would wipe out almost a quarter of the market capitalization of the major indexes. That had a different cause.

Portfolio insurance: The technique, invented by Hayne Leland and Mark Rubinstein in 1976, was an attempt to hedge volatility by shorting index futures to protect a long equity portfolio. As market prices fell, the index puts would be executed, locking in a small loss, and shifting the risk of more losses to the party on the other side of that trade. It was an academic concept, one that hadn’t been stress-tested yet. The working assumption was that a ready buyer would be there to take the other side of the trade, getting paid to assume additional risk. Not so much, as it turned out. Buyers eventually were willing, but only at much lower prices. This created a selling spiral that got out of control. The lack of liquidity was also a problem, as index futures were a relatively new product with modest volume and not a very deep trading history.

The creaky New York Stock Exchange trading structure — it was dated, and human traders were unable to keep up with the volume — was another related issue.

There were other factors as well. Broader geopolitical concerns included Iran (it had attacked U.S. merchant vessels) and collapsing oil prices (by 1986, crude oil prices had dropped by about 50 percent). But the most commonly cited political issue was Treasury Secretary James Baker, who made some inauspicious public comments the prior weekend. He disagreed with his European counterparts about the strong dollar and foreign-exchange rates. Some observers point to his comments as the spark in a room filled with gas vapors.

Of course, none of these individually was a cause, but collectively they contributed to trader anxiety. Once the market opened Monday morning, the blood bath began.

One last thing: President Ronald Reagan downplayed the crash as a “correction,” causing many wags to scoff about his lack of financial acumen. Time proved Reagan right. The Dow finished the year up 1 percent, the S&P 500 with a 2 percent gain. The bull market that began in 1982 still had another dozen years to run.

In the grand scheme of things, Black Monday ended up looking like a modest setback. Even so, let’s hope it was an event that stands as a one-of-a-kind.


Originally published as Black Monday Really Did Look Like 1929 Again



Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Iamthe50percent commented on Oct 19

    I was driving from Newark airport to Edison NJ on business from Oak Brook Illinois. The rental car had an all news channel on. Interspersed with “down another 50/100 points” items were reports of a US destroyer shelling an oil platform in the Persian Gulf. I remember thinking, “Jesus! It’s the End of the World and I’m stuck in Jersey.”

    My favorite quote: A newsman asked one of the brokers if anyone was jumping out of windows yet. The brokers deadpan reply was, “The windows on this building don’t open.”

  2. DeDude commented on Oct 19

    The most useful thing we learned that day was that the economy and the stock market are two separate things. The stock market can lose 25% of its value and the economy still humming along as if nothing had happened.

  3. davebarnes commented on Oct 19

    I worried about it and took no action.
    What could I do?
    Cash out and sit waiting for a further decline?
    Stay in and sit waiting for an improvement?
    Panic and go straight to guns and survival rations?

    You are either an optimist or a pessimist.
    I am optimistic as I believe I that live is more enjoyable that way.

    • bsnceo commented on Oct 19

      well said, sir!

  4. Publius commented on Oct 19

    It wasn’t Black Monday, it was Terrible Tuesday, that shook people up. 2/3rds of the stocks in the S&P 500 stopped trading. I couldn’t get a bid–after calling FIVE primary dealers(!)–for 10mm 12-month T-Bills. T-Bills! We really wondered if the financial system was falling apart. 10-year Treasury Notes went from yielding 10% to 7.25% and back up to 9%

    In the middle of Terrible Tuesday the Dow was down another 7% — 150 points. Then the MMI — the only futures index that kept trading, even though the underlying shares had halted — rallied the equivalent of 350 points in 15 minutes. Orders flooded onto the NYSE floor for GE, Merck, Dow, and all the other underlying shares. Futures started trading again. We just stared at our screens.

    I’ll never forget that day — a junior trader at a small, regional bank. We wondered when the line would form outside. Scenes of the bank run from “It’s a Wonderful Life” ran through our heads. My favorite story from official Washington from that time comes from Alan Greenspan. On the 19th, he got on a 4-hour flight around 1 pm, when the market was down about 250 points. When he got off, he asked how it had finished. “Down five-oh-eight,” was the reply. “Oh, good” he thought, thinking it was minus 5.08. Then he realized: it was down five HUNDRED and eight.

    That was a tough day. But Tuesday was harder. And the full story — of the 350 point MMI rally — has never been told, to my knowledge.

  5. rd commented on Oct 19

    I was at work. We heard that the market had crashed that night on the news. Since all of our stock market assets were in a 401k and 403b that were difficult to make any transactions in, we just ignored it and the market rebounded over the next few months.

  6. Dude commented on Oct 19

    I was walking around the financial district in San Francisco during a lunch break from a medical conference during my residency. A lot of people were crowded into a Schwab office staring at monitors. You could feel the tension from outside and thoughts of 1929 flashed into my head. I was poor and had nothing invested at the time, the world was not going to end, and I was hungry. I had something Japanese.

  7. bigsteve commented on Oct 19

    I was at work and the Boss was the only one in my shop who had money in the market. His response was he still was way up long term and not worried at all. He did nothing.Shortly later I started to invest money through mutual funds in the stock market. Never forgot his reaction to Black Monday and emulated his behaviour during drops in my investment experiences. I have so far come out ahead long term.

  8. Smokefoot commented on Oct 19

    I was at work at my first job when I overheard some of the other engineers talking about the crash and how it was time to buy stock. I didn’t know anything about the stock market at the time, so I didn’t take their advice.

  9. RW commented on Oct 19

    Where was I on Black Monday? At home with a bad cold and feeling pretty feck’n awful actually.

    Other than a couple no-load mutual funds and a few DRiPs I was a stock market tyro and, with the equity segment of my portfolio fully in, mounting losses on Monday were freak-out enough and then the price postings crashed and you couldn’t even tell what the major indices were doing and the panic was full bore on.

    It’s probably a good thing that I couldn’t find anyone to broker my shares or I would almost certainly have done something foolish instead of just downing some extra cough syrup and sleeping it out.

    Wednesday I was feeling a little better and, with a clearer head, held steady. Probably should have bought more but frankly just standing pat was about as much as I had stones for.

  10. Joe commented on Oct 19

    I was on the way back from NYC and a successful Stereophile show. I left at 6:00 am and arrived in Austin to read headlines in gazzilion point type. My dealer greeted me with, “I just lost a $55,000 sale.” There’s a 3 beers story there.

  11. rsgiolito commented on Oct 19

    I was returning that afternoon from Miami to Atlanta on an Eastern Air Lines (remember them?) flight. The airport lounges were a little more buzzy than usual, everyone looking at the tv screens and commenting. Having started my retirement investments a few years earlier, I thought, oh well, I’ll just have to work a little longer. Little did I know that this scenario would repeat itself just about every ten years thereafter. And now I’m still working!

  12. Jamiter commented on Oct 19

    I was a book official on the P Coast Options floor. I remember walking in an hour early as I thought Friday had been a blood bath. You could hear all the trade ticket printers already going like mad, even that early.

Posted Under