Marking 30 Years Since The Stock Market Crash Of 1987

Marking 30 Years Since The Stock Market Crash Of 1987

Let’s travel back in time to the fall of 1987. Shoulder pads were big, hair was even bigger, and the decade of excess was well underway, although we wouldn’t hear Gordon Gekko proclaim “greed is good” in the movie Wall Street for a couple more months. This month marks the 30-year anniversary of the stock market crash that occurred on Monday, October 19, 1987, and ended a five-year bull market. On that day, the Dow Jones Industrial Average fell by 508 points, equivalent to 22.6% of its total value, while the S&P 500 lost 20.5% of its value. At the time, this was the largest single day point drop that Wall Street had ever seen, and it still stands as the single biggest one-day percentage decline.


ValueWalk’s July 2022 Hedge Fund Update: Tiger Cub Hedge Fund Shuts Down

investWelcome to our latest issue of issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Andurand's oil trading profits surge, Bridgewater profits from credit, and Tiger Cub Hedge Fund shuts down. Q1 2022 hedge fund letters, conferences Read More

The sell-off that day actually began in Asia, with the Hong Kong Hang Seng index dropping 420.8 points, an 11.1% drop. The rout continued as markets opened in Tokyo, Sydney, Frankfurt, Amsterdam, and Paris. When London markets finally got into the act (the market was closed the previous Friday) the UK FTSE plummeted 10.8%. Following the sharp drop in U.S. markets, exchanges in Asia and Europe actually saw their biggest declines on October 20, 1987, as the U.S. market rebounded.

The causes of “Black Monday” are still being debated, but there were several contributing factors that led to dramatically and rapidly reduce investor confidence in equities over the course of a few days.

A Look Back at 1987

The first factor often blamed for the 1987 crash was the development of new and complex investment vehicles, often programmed to trade automatically on untested computerized systems. Derivatives (index options and futures) were the sexy new financial instruments at the time, and money managers implemented computer programs that would automatically trade these derivatives as the market moved. On October 19, these programs set in motion a high volume of sell orders, which created an atmosphere of panic and caused liquidity to evaporate for many stocks.

Several economic factors also came into play in the days and weeks leading up to the 1987 crash. First of all, we saw a rapid acceleration of inflation starting in the first quarter of the year as oil prices surged. In July 1987, WTI peaked at $22 per barrel, the highest price in 18 months and nearly double the price from a year earlier. It is important to note that the 1979 energy crisis was a not-so-distant memory for most market participants at the time; therefore, the doubling of oil prices was a significant concern. Year-over-year overall CPI growth jumped from 1.4% in January 1987 to 4.3% in September 1987, largely due to a rapid increase in transportation costs as a result of higher energy prices.

Besides energy, another inflationary factor was the decline in the value of the U.S. dollar, which pushed up the price of imported goods. The weaker dollar was the result of concerted global central bank intervention, organized at the 1985 Plaza Accord in response to the strengthening of the dollar seen from 1980-1985. As a result of the accord, the dollar fell precipitously over the next two years. The February 1987 Louvre Accord was intended to halt the dollar’s decline, but this agreement proved to be much less effective than the 1985 agreement, and the participants’ public squabbling didn’t inspire market confidence. Between February 1985 and October 1987 the dollar depreciated by 38% vs. the British pound and by 47% vs. the Japanese yen.

Stock Market Crash

Concerns about rising inflation and the weakening U.S. dollar made dollar-denominated assets less attractive, pushing up interest rates. The U.S. treasury 10-year yield rose from 7.2% at the beginning of 1987 to 10% by mid-October. At the same time, the Federal Reserve was tightening monetary policy; the Fed funds rate went from 5 7/8 to 7 ¼, an increase of 137.5 basis points. During this time, leadership at the Fed changed hands; Paul Volcker served as Federal Reserve chair until August 11, 1987, at which time, Alan Greenspan took over the job.

Stock Market Crash

Due to the strengthening dollar in the first half of the 1980s, the U.S. trade deficit surged. By the mid-1980s, monthly trade figures became one of most closely watched economic indicators. In theory, a weaker dollar would help to reduce the trade deficit, as imports become more expensive and export prices fall, but the deficit continued to grow in the summer of 1987. On October 14, 1987, the government released August numbers that showed improvement from the previous month’s record $16.5 billion trade deficit; however, the reduction in the deficit was not as much as markets had expected, leading to a 95.46 point decline in the Dow, a 3.8% drop. Note that this was the Wednesday before Black Monday. The Dow continued to fall on Thursday and Friday that week, by 2.4% and 4.6%, respectively. Over the course of four days, between October 14 and 19, 1987 the S&P 500 lost 28.5% of its value, while the Dow lost 30.7% of its value.

Additional research has highlighted that this four-day decline coincided with the introduction of a bill in Congress that would have placed limitations on interest deductions on debt used to finance mergers and acquisitions. This takeover-tax bill was introduced on October 13, and was approved on October 15 by the House Ways and Means Committee. Though the legislation was eventually abandoned, in 1987 corporate profits were soaring and it would have had a significant negative impact on company valuations. Forecasts for continued strong profit growth drove stocks to new highs leading up to the crash, with the P/E ratio for the S&P 500 soaring. According to monthly data from Nobel Prize winning economist Robert Shiller, PhD, the S&P 500 P/E ratio averaged approximately 15:1 between 1881 and 1987; between August 1985 and August 1987, the P/E soared from 11:1 to 18:1.

Stock Market Crash

As the anniversary of the 1987 crash approaches, is there any reason to believe that the current bull market could come to a similar end? We’ll explore the similarities and differences between 1987 and 2017 in part two.

Article by Sara Potter, FactSet

Updated on

No posts to display


Comments are closed.