What Caused The Stock Market Crash In 1987?

Referred to as Black Monday, the stock market crash in 1987 marked a day where markets fell suddenly around the world beginning in Hong Kong and continuing on to the United States with the Dow Jones Industrial Average declining by 22.61% to 1738.74.

Stock Market Crash In 1987
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The staggering drop of 508 points in one trading day left investors shocked and wondering if another Great Depression might be on the horizon. Despite the dire predictions of economists, the Dow was positive for the year, although did not recover its high of 2,722 for two years.

While there has not been any single identified cause of the market crash, many have speculated that overvaluation, liquidity, market psychology and program trading were the main culprits for the decline.

Events Leading Up To The Stock Market Crash In 1987

In the year leading up to the stock market crash in 1987 the United States experienced a shift in its economy, as a quickly growing recovery gave way to a slower growing expansion. The Dow surged 44% over the course of the year to close at 2,722 in August of 1987.

October 14, 1987 marked the start of the decline with what was then a record 95.46 drop in the Dow Jones Industrial Average, followed by a 58 point decline the following day. This put the Dow at 12% lower than its record high.

An unexpected storm closed London trading Friday, October 16, and the Dow saw an additional 108.35 decline on record volume. Investors had a long weekend of worrying over their investments. Far East markets began the decline on the morning of October 19 and the damage spread east to US markets.

Possible Causes Of The Stock Market Crash In 1987

Many people have speculated as to the possible causes of the stock market crash in 1987, with the most common reasons cited being program trading and market psychology.

With the advent of readily available computer technology, the use of program trading on Wall Street grew dramatically. This increase in program trading has been the main reason cited for the crash, as program trading strategies blindly sold stocks as the markets fell, worsening the decline.

Economists have even theorized that the speculative boom that occurred in the market in the year leading up to the crash was the result of program trading, and that the crash was in fact a return to reasonable valuations.

Although it has been shown the program trading could not have been the sole cause of the market crash, it still took the brunt of the blame in the public eye.

While the use of program trading certainly did not help the situation, as the writers of portfolio insurance derivatives were forced to sell with every downward move in the market, the likely cause of the severity in the decline was market psychology. As major financial institutions dumped their stocks, a wave of selling pressure and downward price momentum ensued.

Although the market crash in 1987 was severe, it failed to lead the United States into another Great Depression as many had feared, and the market eventually stabilized, eventually posting gains for the year.