When it comes to “Black Monday” people of finance industry usually refer to the events of October 19, 1987. On that day, world stock markets collapsed leading to ominous figures as the biggest one-day percentage drop of the DJIA (nearly 22% of steep dive). It all kicked off in Hong Kong and then absorbed western countries along with the UK and the USA. Both New Zealand and Australia had stumbled upon the crash too but on the following “Black Tuesday” due to different time zones applied.
Why would such a destructive crisis happen in the late 80s? Well, at that time the US economy had been recovering from a severe economic recession followed by high unemployment and slower expansion, which subsequently led to the so-called “soft landing”. Overall, the US stock market had been running bullish with the DJIA hitting new highs at 2,722 in August 1987. Unfortunately, that gave little confidence over oncoming OPEC crisis and a sharp 50% cut of crude oil prices. Further to this – Federal Reserve had underestimated the possibility of a bear trend – hence slashed IRs, excess liquidity and wrong expectations over the slipping greenback value due to a spat with the G7 members.
Stock markets responded very fast to the sequence of disruptive events. October 15, 1987 – Iranian forces with a Silkworm missile struck the Sungari, an American petroleum tanker. The next day Iranian missile hit another vessel. October 16, 1987 – London stock exchange was unexpectedly shutdown over Great Storm violence. When Dow Jones lost 4.6% and closed at 2,246 the US Treasury Secretary had to admit the gravity of weak prices. The crash itself blew up in the Asian markets on Monday, October 19 and revved up on London sessions amid the early close on October 16. The London FTSE100 had lost more than 130 points by 9.30am UK time. In addition, the US maritime force attacked an Iranian oil rig in response to the previous attack on supertanker.
The “Black Monday” became one of the most fateful days in stock market history. By the end of the month, markets had suffered from significant declines across the whole world. Over 45% in Hong Kong, 42% in Australia, 26% in the UK and 22% in the US. New Zealand had a massive 60% drop from the year highs, and would refuse to ease monetary policy to somewhat overcome the crisis.
The Bottom Line
Market participants put too much blame on the program trading orders, which accelerated the liquidation of stocks as their stop-losses were hit, thus amplifying the price decline across the exchange. As many economists said, the idea of deploying computer programs was very new to the Wall Street and large-scale trading orders had never undergone tests before. Further to this – all the bids had disappeared across the stock markets at that time – hence ripple effect all the day down to the bottom. After this notorious day, regulators fixed all the gaps in trade-processing protocols and implemented trading curbs that would prevent massive prices declines happening in future.