20th Anniversary Of "Black Monday" Crash Of '87

Today marks the 20th anniversary of the “Black Monday” crash of ’87, in which the stock market lost 22.6% in one day, the second largest one day percentage drop in history and one we’re not likely to see again any time soon.

These days “circuit breakers” (instituted to prevent crashes like “Black Monday”) trip when stock prices start falling, causing the market to shut down. Theoretically, the most the Dow could lose in a day is 30%, a drop that would shut the market down for a full day. Smaller, “mini-crashes” have taken place as recently as this year.

Thought the ’87 crash didn’t spiral the country into another Great Depression, the New York Times from October 20, 1987 makes it clear: Everyone was worried that “Black Monday” was just the day before another “Black Tuesday.”

From The New York Times, Oct. 20, 1987:

As stock prices soared this year, a chorus of pessimists warned that 1987 was looking more like 1929, when a stock market crash helped to usher in the Great Depression. Yesterday, after a plunge reminiscent of the worst days of 1929, one pressing question was whether the aftershocks would be as devastating to individuals and the nation.

The quick answer, many economists say, is no. The huge losses on Wall Street constitute a substantial blow to the economy at large. But there are many safeguards in place today -some instituted directly in response to the Depression – that would tend to prevent the cascading financial collapse that characterized the crash, impoverishing millions of Americans.

”A stock market crash doesn’t ripple out into the economy with the same force” as it did in 1929, said Geoffrey H. Moore, director of the Center for International Business Cycle Research at Columbia University.

To be sure, there are some unsettling similarities between the current era and the pre-Depression years. Like the Roaring Twenties, the 1980′s have seen an astonishing boom Wall Street. Now as then, individual and corporate debt are high, and some sectors of the economy are extremely weak. Trade relations are strained, with protectionist sentiment growing.

But today’s economy is better equipped to handle financial shocks. ”I don’t see this decline in the stock market leading to a great breakdown in the economy,” said Robert A. Kavesh, a professor of finance and economics at the New York University School of Business. ”There are still many elements of strength in the economy -profits are strong, for example.”

Among the important differences between today and 1929 are Federal deposit insurance, unemployment insurance and Social Security insurance and other elements of what has come to be known as the safety net. These not only guarantee against widespread destitution; their very existence should also help to prevent the kind of financial panic that fed on itself in the Depression.

”In 1929, you didn’t have insurance of bank deposits, you didn’t have the Securities and Exchange Commission, you had much less knowledge of how the economy worked,” Professor Kavesh said.

Black Monday [Wikipedia]
STOCKS PLUNGE 508 POINTS, A DROP OF 22.6%; 604 MILLION VOLUME NEARLY DOUBLES RECORD; Does 1987 Equal 1929? [New York Times]
After ’87, today’s fear is the mini-crash [CNNMoney]

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  1. hypnotik_jello says:

    Dow is down 222 points as we speak.

    Kablammo!

  2. Beerad says:

    I remember it well because my middle school math class was doing one of those “pick a stock and pretend you bought $1000 worth and let’s track them as a class” exercises. Unsurprisingly, nobody’s stock did particularly well that month.

  3. gorckat says:

    222 is nothing today, percentage wise, compared to ’87.

  4. lhutz34 says:

    This is a lesson in long term investing: Let’s say you had put your 100,000 into a Dow index the day before the crash. If you had cashed out the next day, you would have lost $22,000. However, that 100,000 that you invested when the Dow was at the “unsustainably” high level of 2500 would have increased in value by almost $450,000 as of today.

    “The Stock Market is designed to transfer money from the Active to the Patient.” – Warren Buffett

  5. RandomHookup says:

    I lost what seemed like a lot of invested money that day. Didn’t sweat it cause it was too late then.

  6. karmaghost says:

    Oooooh, maybe that’s why the DOW closed down 366 points today. I thought it was the 3 record high closings for oil in 5 days. $90 a barrel! Whooo hooo!

  7. hapless says:

    @lhutz34:

    After inflation, that’s a terrible yield. 10-20% losses.

  8. S-the-K says:

    The reason the crash of 1987 and the crash of 2000-2001 didn’t result in Great Depression II is that we don’t have the same economic conditions that we did in the 1920s. We also don’t have the policies of FDR that made a cyclical recession or a short-term depression (ala 1921) into a decade-long Great Depression.

    See: “FDR’s Folly” by Jim Powell.