Published October 19, 2012
Silver anniversaries are often joyous occasions, but those who remember the epic market crash of Black Monday exactly 25 years ago are more likely to shudder than smile at those scary memories.
That infamous crash sent fear coursing through the global financial markets, causing the Dow Jones Industrial Average to plummet almost 23% -- by far the worst decline in its history.
“We looked into the abyss that day,” Peter Kenny, a managing director at Knight Capital Group (KCG), wrote in a note to clients. “Firms folded, members left the business permanently and the face of the market was changed -- forever.”
Global markets, which had generated healthy annual returns before that day, began showing signs of trouble overseas in Asia.
The selling then swept across Europe and onto Wall Street, causing panic and widespread confusion.
“It was chaos. People who were in the markets were shell-shocked,” said Richard Sylla, an economics professor and financial historian at NYU. “If you were lucky enough to get through on the phone to your broker, you didn’t really know what happened. Your order was behinds hundreds and thousands of other transactions.”
'Baptism By Fire'
Kenny was a newly-minted member of the New York Stock Exchange in the fall of 1987 after having established a sole proprietorship to execute trades earlier that year.
“It was a job I could not wait to get to in the morning and one that I did not want to leave after the closing bell rang. I loved it,” Kenny said.
He surely remembers the sound of the closing bell on October 19, 1987.
“That day was what could euphemistically be called a baptism by fire,” he said. “This date -- 25 years ago changed everything and was in some respects the birth of a new age.”
As the selling gained momentum, markets around the world suffered gigantic damage: down 31% in Spain, 42% in Australia, 45% in Hong Kong and a stunning 60% in New Zealand.
“I remember thinking: It’s over. I would have to think about using my college degree for something other than trading commodities,” Larry Shover, chief investment officer at SFG Alternatives, told FOX Business.
Equivalent to 3,000-Point Meltdown Today
By the time the dust had settled, the Dow suffered a decline of 22.6% decline, wiping out an incredible 508 points from the index.
To put that percentage loss into perspective, today’s blue chips would need to plummet an unfathomable 3,062 points to match the carnage of Black Monday.
Even during the scary financial crisis of 2008 the Dow never suffered a steeper selloff than 7.87% on October 15 during the midst of the financial crisis. That marks the Dow’s ninth worst day in history.
The ’87 crash brought back memories of the 1929 stock market crash, which caused the Dow to dive 12.82% on October 28 and then 11.73% the very next day – setting off the Great Depression.
“People were scared. People were predicting in 1987: ‘Uh oh. We’re going to have another Great Depression,’” said Sylla.
Those fears proved to be overdone though as the markets actually ended 1987 with a gain on the year and no recession emerged until the middle of 1990.
For investors not around for Black Monday, two of the only similar selloffs that come to mind are the 2010 flash crash and the days after the 9/11 terrorist attacks.
Sylla said the flash crash was “small potatoes” in comparison. While the blue chips did plummet almost 1,000 points, or around 9%, that day, the losses were as fleeting as they were mysterious.
September 17, 2001 might be a better comparison as the benchmark index plummeted 685 points, or 7.13%, on the day the NYSE reopened following the horrific attacks.
The impact of Black Monday can still be felt today.
That terrible day led the NYSE to install circuit breakers that automatically halt trading once predetermined thresholds are hit on the major indexes.
For example, as of the fourth quarter of this year, if the Dow dives 1,350-points, or around 10%, before 2 p.m. ET, trading would be halted for one hour. A 2,700-point plunge before 1 p.m. ET would prompt a two-hour halt to trading, while a 4,050-point meltdown (30%) would close the market for the day, regardless of the time.
However, Sylla notes that some blamed technology issues for the Black Monday crash, similar to the concern over high-frequency trading stemming from the '10 flash crash.
“It suggests to me we haven’t learned some of the lessons of history in the sense that computers led us into the crash in 1987 and now we’re back in love with computers,” said Sylla.