“Panic!” screamed the New York Daily News headline. “Wall Street’s Blackest Day Rocks Nation,” the front page of the New York Post blared
On Oct. 19, 1987, the Dow Jones Industrial Average plummeted 508 points, a 22.6 percent drop that remains the largest one-day percentage decline in Wall Street history. Some $500 billion in U.S. equity value was wiped out on what came to be known as Black Monday.
From Wall Street to Main Street, the seismic stock market decline shook the country, igniting fears that another Great Depression was on the way.
During a press conference, John Phelan, the chairman of the New York Stock Exchange at the time, called the sell-off “the worst market I have ever seen in my lifetime or would hope to see again.”
So, what happened on Oct. 19, 1987, to trigger such a sharp decline? Let’s take a look back at that day—and the years before it—to understand what happened.
To understand Black Monday, it helps to look further back in time.
The stock market was on a tear in 1986 and during the first eight months of 1987, a continuation of the great bull market of the 1980s that began on Aug. 13, 1982, when the Dow stood at just 788.05. By Aug. 25, 1987, the index had surged to a high of 2,722.43, a nearly 250 percent gain from 1982, and a stunning 43 percent gain in just that year alone.
But in the week leading up to Black Monday, a slew of disturbing news was rattling investors. On Wednesday morning, Oct. 14, news broke that the U.S. House of Representatives had filed legislation to eliminate the tax benefits associated with financing mergers. On the same day, the U.S. Commerce Department announced a larger than expected trade deficit, triggering a decline in the dollar.
Meanwhile, that same week, Iran missiles had hit two American-owned oil tankers, setting off fears of a possible showdown in the Middle East.
The Dow fell 235 points, or 9.49 percent, in the week leading up to Black Monday, marking a 17 percent drop from the high reached on Aug. 25.
Then, over the weekend, then-Treasury Secretary James Baker publicly threatened to devalue the U.S. dollar in an effort to shrink the country’s rising trade deficit.
On Sunday night, stocks began to sell off as markets opened in Asia, and then in Europe.
Kenneth Polcari, a managing director at O’Neil Securities, who was a 26-year-old institutional floor broker at the NYSE at the time, recalls receiving an ominous phone call from a customer Monday morning, before the opening bell.
“He said this bloodbath was coming to the shores of the U.S,’” Polcari said.
Sure enough, the Dow fell at the open as sell orders far outpaced buy orders. Big sell orders from institutional investors flooded in and continued throughout the day. One large institution started selling large blocks of nearly $100 million in stock at around 10 a.m. and sold thirteen installments for a total liquidation of about $1.1 billion, according to an account by the Federal Reserve.
“It was like a bombshell,” said David Ruder, who at the time had just begun his tenure as chairman of the Securities and Exchange Commission. “Every hour these large sales would come in.”
The frenzied activity bumped up trading volume to unprecedented levels. On the NYSE, an estimated 604.3 million shares changed hands, almost double the previous record of 338.5 million shares set just the prior Friday.
Blue chip names plummeted. “On Friday, Johnson & Johnson had closed at around $95 a share, on Monday it closed at $45,” Polcari said. “It lost $50 of its value in six hours.”
On Monday afternoon, in Washington D.C., former Financial Industry Regulatory Authority chief executive Richard Ketchum, who at the time was serving as director of the SEC Division of Market Regulation, looked at a computer screen to assess the damage.
“Every trade was down,” Ketchum said. “Everything was red.”
Across Wall Street, there were concerns that financial institutions may have suffered heavy losses amid the furious trading. As Polcari headed home from work that night, he worried about the fallout from the market crash. “I didn’t know if I would have a job the next day,” he said.
The day after the deluge, the SEC worked with the NYSE to ease the path for public companies to buy their own shares and support demand for their stock. Federal Reserve Chairman Alan Greenspan issued a statement at the market open affirming the Fed’s readiness to serve as a source of liquidity to support the economic and financial system.
In the early hours of trading, the market rebounded. But then “the market came crashing down,” Ketchum recalled. “There was a moment when everyone said, ‘I don’t know where the bottom is.’”
“The scariest part of the week occurred on Tuesday around noon,” Ruder recalled.
At around that time the former SEC chairman received a phone call from Phelan at NYSE. “He said ‘we are considering closing the exchange,’” Ruder said.
But later in the afternoon, the stock market rebounded as companies announced stock buyback programs. The NYSE remained open.
The Dow continued to recover in the days and weeks ahead, and by early 1989, it had regained its pre-crash high of 2,722 points. Despite the fears that erupted with the crash, in the years that followed Black Monday, the economy did not spiral downward.
In the wake of Oct. 19, 1987, regulators and economists identified multiple factors that contributed to the depth of the crash. Some pointed to the rapid run-up in stocks in the years heading into Black Monday.
“There was some irrational exuberance,” said Richard Sylla, a professor of the history of financial institutions and markets at NYU Stern School of Business.
One of the most oft-cited causes of the crash is “portfolio insurance,” a popular hedging strategy at the time. Portfolio insurance was a form of “program trading” where computers are set up to quickly trade large amounts of stock, when certain scenarios occur. The goal was to limit the losses an investor might encounter in the face of a declining market.
“The trouble was on Black Monday everything went down at the same time so these institutions were selling huge amounts,” Ketchum said.
Some say the difficulty of obtaining information also likely contributed to the herd mentality. The systems in place at the time weren’t able to process so many transactions at one time and so traders couldn’t get an accurate read on prices. As a result, many sought to sell.
But while the stock market of Black Monday did tremendous damage, it also led to market protections that remain in place today. The NYSE introduced circuit breakers that can temporarily pause trading in stocks during periods of high volatility. The idea was to give traders time to assimilate information.
In the years since, exchanges and regulators have introduced further refinements to such circuit breakers, including new limit up/limit down regulation approved in 2012.
“There are times when it’s important to take a time out,” Ketchum said.
While you can never say with certainty that we’ll never see another Black Monday-type crash again, Ketchum noted major market improvements over the past 30 years make a crash of that magnitude less likely today.
“Market mechanics are much better,” he said. “Large financial firms are much better capitalized and have a much better ability to absorb losses. Investors should feel very good.”