In stock market terms, Black Monday refers to 19th October 1987 when stock markets around the world crashed losing huge value in a very short space of time.
The crash began in Hong Kong spreading west to Europe and then on to America where the Dow Jones Industrial Average fell exactly 508 points, almost 23%. This was, and still is, the biggest single day fall in stock market history. The UK Footsie 100 fell 10.8% in a single day and over the following week dropped a further 16% for a weekly loss of 26.8%. Suddenly an investment of £10000 in the Footsie Index had lost almost £2700 in seven days for no apparent reason.
By the end of October, stock markets in Hong Kong, Australia, Spain, the UK, United States and Canada had fallen 45%, 42%, 31%, 26%, 23% and 22% respectively. New Zealand was particularly hard hit falling by more than 60% from its 1987 peak. Japan on the other hand was hardly affected, although it would experience its own stock market crash and prolonged deflationary recession two years later at the end of 1989.
Following the stock market crash a group of 33 eminent economists from various nations held a summit conference in Washington DC and collectively predicted that “the next few years could be the most troubled since the 1930’s with a deep recession”. However, the world economy was barely affected, and economic growth actually increased throughout 1987 and 1988. The Dow Jones regained its pre-crash closing high in early 1989 as did the UK Footsie 100 and most other markets, with the exception of New Zealand which took several years to recover. The damage to the New Zealand economy was compounded by a high exchange rate and the Reserve Bank of New Zealand’s refusal to loosen monetary policy in response to the crisis.
In the years leading up to the crash, stock markets had been rising significantly year on year and in the year before the crash the Dow Jones had risen by 44%. Theories about the possible causes for the rapid decline were many, including selling by program traders, overvaluation of equities, illiquidity, market psychology and the perceived threat of an increase in interest rates.
Further financial uncertainty may have resulted from the collapse of OPEC in early 1986 which led to a crude oil price fall of more than 50% by mid-1986. Escalating tensions between the USA and Iran and the latter’s aggression in Kuwait’s main oil port on October 15th and 16th could also have unsettled financial markets.
On the Friday before the crash, markets in London were unexpectedly closed due to the Great Storm of 1987 and this may have led to a back log of sell trades in the Footsie 100 following a 5.5% fall in the Dow Jones the previous day.
In truth, there are many possible reasons for the sudden fall in share prices, with the most popular explanation being the introduction of selling by program traders, which came as a reaction to the computerised selling, triggered by the breaking of stop loss barriers which aggravated the falls. Selling begets more selling. The selling was so bad that circuit breakers were introduced shortly afterwards.
The crash was quick and painful, a reminder that bull markets climb the stairs but bear markets go down in the lift. In this case, however, recovery was almost as fast.
Could the same thing happen again and if so what can we do to protect ourselves?
A number of lessons can be learned:
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