The Black Monday and Stock Market Crash
An Introduction To Black Monday
In the world of finance, the term Black Monday refers to Monday, October 18th, 1987, when the US stock market and others around the globe came crashing like a pack of cards. However, this phenomenon has also occurred three other times, including October 28th, 1929, and the market correction experienced in August of 2015 and March 2020.
On this fateful day, the Dow Jones Industrial Average came crashing down by 508 points and lost 22 percent of its value. The S&P 500 went down by 57.6 points at 20 percent in what was referred to as the largest stock market crash in US history. Although there are four Black Mondays, the events of 1929 and 1987 will remain etched in the minds of traders and investors for centuries to come.
The Black Monday of 1987 was different. First, it does not need over two and a half-decade for the economy to recover as it was referred to as benign. This is regardless of the largest single-day percentage drop of the Dow Jones Industrial Average. The economy was back on its feet in less than 2 years. It is unusual for the bullish market to suddenly appear in the bear. However, these crashes showed the weaknesses and cracks in the trading system.
Have we learned from these incidences and move or changed? Hmmm!
Other global enzymatic factors that also aided this crash include massive price changes, margin calls, timing, and more led to the weakening of an already fragile financial stock market. Monday, 19/10/1987 will forever be remembered as the day the stock exchanges across the globe buckled under the pressure and crashed.
What Causes The Market To Crash?
From past events, the market crash cannot be tied down to one particular incidence. However, several warning signs created the perfect atmosphere that caused investors to panic and go into sell mode. The economy slowed, the aroma of inflation was beginning to spread, unemployment increased, most sectors were failing, and the stock market was diverging.
Furthermore, stocks traded were not at their real value. The trade deficit between the US and other global economies widened as the dollars gained strength. The announcement of a fall in the value of the dollar did not help either. Speaking of the dollar fall, in 1985, the US and France, Japan, the UK, and Germany sign an accord known as the Plaza Accord to create a devaluation of the dollar and balance the currency of these other economies with the dollar. This worked, and by the turn of 1987, the deficit gap flattened and invoked a boom in the economy.
Soon after, another accord was signed, the Louvre Accord, this was to stop the continuous decline of the dollar. As other G6 nations played their part, the US was to reduce its fiscal deficit by dropping the GDP percentage. It also reduced government expenditures and keep interest rates low. With this act, the Federal Reserve tightens monetary policies in the 2nd and 3rd quarters resulting in the 1987 crash of the market. Other factors are:
This can be legal or illegal as the case may be. However, insider trading is an event where certain people trade the shares of a stock based on information from the proposed company, which was not be made known to the public.
For example, investor's reactions move the market by the information or news passed on the floor. If a stock is going to drop and the company knowingly sells off its stock but fails to declare, it is insider trade. During the 1987 crash, the government had a crackdown on corruption and insider trading, but it is not entirely to blame.
A fall in the dollar strength
After two accords, the dollar devaluation scared investors who were afraid to lose hence sold their shares at an alarming rate. The US took a gamble and ended up the struggle for life as the market came crashing.
Unrest and Interference in the Middle East
The US retaliated with a missile attack on an Iranian oil production field after a previous incident. For many investors, they felt the US was fighting and partaking in what was clearly not their business.
The introduction of the computerized system
Technology can be good or bad. In the stock market, it is a risky variable. Using old trading techniques meant the processes followed a trajectory with the necessary information passed down. With computerization, it was easy for investors to sell without accurate data leading to a crash.
Can Black Monday happen again?
Human intervention will always play a role in the stock market, and that was seen in August 2015 when the DJIA dropped 16 percent at 1,089 points. Although it quickly recovered, factors that influenced it was the devaluation of the Chinese Yuan due to slow economic growth.
March 9th, 2020, amid the pandemic, the DJIA has a 7.8 percent drop and lost 2,353 points with a 9.9 percent on the 12th after a record high in the previous month. This ended the bull market of nearly 11 years as the DJIA entered a bear era.
What measures are in place to prevent a crash?
The stock market will always be stretched beyond its limit at some point. However, with 4 documented crashes, investors have come to accept one thing; a crash is not the end of it all. There is a recovery process, but patience is needed. In fact, some have said to invest in a crashed asset, as its bounce back is incredible.
While we leave you to consider, the following are ways to limit the impact of a crash market.
Trading Times – economists believe that excessive trading times are part of the reason for market crashes. The market does not have a breathing space to recover or catch its breath. Today, many exchanges have reduced trading times and stopped weekend trades. In some countries, lunch breaks are mandatory.
Circuit breakers - these are strategies that stop on-going trade at specific percentages to curb panic selling by investors. The breaks are to allow traders and investors to take a good look at the market calmly and make rational decisions. The circuit breaker triggers for the S&P 500 go off at 7, 13, and 20 percent intraday.
Interval market correction for a bull market – along the bullish market is good, but a correction is needed to balance the price-earnings ratio and stop the overvaluation of an undervalued stock. Some believed the long duration of a correction as part of the 1987 crash hence the need for consistent correction to keep the market aligned.
Thankfully, the 1987 crash did not lead to any significant detrimental impact on the economy like the 1929 crash, but crucial lessons were learned. It is the blueprint to understanding the volatility of the market and how best to handle cases in the future.
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