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Quote of the Day

An initial price decline starts a vicious circle by causing portfolio insurers to sell, causing further price declines, causing portfolio insurers to sell again, and so on.”

-Robert Schiller, in a 1988 article titled, “Portfolio Insurance and Other Investor Fashions as Factors in the 1987 Market Crash

No other time in history led to a cascading selloff quite like Black Monday – October 19th, 1987. Here is a timeline put together by the Federal Reserve on the days leading up to the crash:

sp_500_index_around_the_time_of_the_crash

Read below for much more on “Black Monday”, the crash of October 19th, 1987:

October 19th – This Day in Stock Market History: Black Monday, 1987

October 19th, 1907 – The Panic of 1907 continues to its 5th day. A day after falling from 103 to 78, newly IPO’d Westinghouse opens at 35, causing 2 brokerages to fail and thousands of speculators to be wiped out.

Westinghouse would eventually go into receivership, and J.P Morgan would eventually gain control of the company.

Source: It Was A Very Good Year

October 19th, 1987 – “Black Monday” on Wall Street as the stock market experiences its worst day in history.

The Dow Jones Industrial Average dropped 508 points, more than 22% (equivalent to a 5,650 point drop today, with the Dow at about 25,000).

Just how bad was the 1987 crash? Here are some screenshots from a few newscasts the night of October 19th, 1987:

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And the printed media continued the coverage:

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Overnight, investors went from wildly optimistic (the market was up 44% over the previous 7 months before the crash) to complete panic.

The press related the 1987 crash to 1929, the start of the great depression. Nightly news reports questioned whether investors should keep their money in the stock market. Mutual funds saw record outflows.

Unlike 1929, where it took investors 24 years to recover their losses, it would take the market “only” 2 years to recover the losses experienced on this day in 1987. Stock markets would recover over half of the decline in the next two trading sessions, as the Dow Jones Industrial Average gained 288 points.

The effects of the 1987 crash also led to the development of today’s “circuit breakers” that halt trading after severe declines in the stock markets.

There had been small signs of traders’ unease prior to black Monday 1987. On October 14th, the Dow Jones Industrial Average had its largest point drop in history, falling 95 points, portfolio insurance and stop orders were also becoming popular, which may have also worsened the fall.

If you have time, this documentary on the crash is pretty interesting:

Best October 19th in Dow Jones Industrial Average History

1932 – Up 3.54%, 2.25 points.

Worst October 19th in Dow Jones Industrial Average History

1987 – Down 22.61%, 508 points.

Read of the Day

I love reading historic newspapers on days like October 19th 1987.

Panic filled the air and rational thoughts were out the window. The stories from that day offer a great glimpse into the minds of traders, who were experiencing the same emotions we feel today. Next time you read sensational headlines (Whether of panic or optimism), think about some things said on this day in October, 1987.

Here are a few major newspaper’s coverage of Black Monday:

The New York Times

“Does 1987 equal 1929?”

USA Today

“The market is going to 800. There is no doubt in my mind.”

It didn’t, The Dow Jones Industrial Average would hit a low of 1616 the morning of the 20th before recovering (and never looking back).

The Wall Street Journal

Selloff compared to Chernobyl

<– Go To Previous Day: October 18th, 1907 -The Panic of 1907 is into its 4th day

Go To Next Day: October 20th, 1987 – One day after the record 22.6% drop on “Black Monday”, stocks begin to rebound 5%. –>