Black Monday 1987Black Monday is used most often to refer to the largest one-day percentage drop in stock market history. It occurred on October 19, 1987, when the Dow Jones Industrial Average dropped 22.61%, falling 508 points to 1738.74. The S&P 500 fell 20.4%, dropping 57.64 points to 225.06. It took two years for the Dow to regain this loss.
The stock market had been in a bull market for five years. It rose 43% in 1987 alone, reaching a peak of 2,746.65 on August 25, 1987. It continued to stay in a lightly lower trading range until October 2, when it began falling dramatically. It lost 15% in the two weeks leading up to Black Monday.
What caused the crash? A Securities and Exchange Commission (SEC) study concluded that it was traders' fears over the impact of anti-takeover legislation that was moving through the House Ways and Means Committee. The legislation was first introduced on Tuesday, October 13, and passed on October 15. In just those three days, stock prices fell more than 10%, the largest 3-day drop in 50 years. Furthermore, the stocks that fell the most were the companies that would have been hurt the most by the legislation.
What did the bill propose? To eliminate the tax deduction for loans used to finance corporate takeovers. The 1980s was the era of Michael Milken and Ivan Boesky, both of whom admitted engaging in illegal insider trading on upcoming mergers and acquisitions. This bill, among others, was Congress' way to regulate the markets. Black Monday was Wall Street's reaction. Ironically, the tax deduction provision was actually stripped from the bill before it became law.
There were other contributing factors, as well. The sell-off was accentuated by computer trading programs. They have set points that automatically called in sell orders when the market dropped by a certain percentage. Dealers on the New York Stock Exchange were overwhelmed when all these programs acted at once. They just couldn't find enough buyers for some stocks, so that trading had to be halted for them.
Another contributing factor was an announcement on October 16 by Treasury Secretary James Baker that the U.S. might let the value of the dollar fall. This would make U.S. stock prices cheaper for foreign investors, many of whom started to sell. Baker thought that a lower dollar would help reduce the alarming rise in the U.S. trade deficit.(Source: Jennifer Itskevich, History News Network, What Caused the Stock Market Crash of 1987?, July 31, 2002)
Many feared the crash would cause a recession. However, the Federal Reserve started pumping money into banks. As a result, the market stabilized. By the end of October, the Dow had already risen 15% higher. It spent the rest of the year in a narrow trading range, between 1,776 and 2,014. However, it was a precursor to the 1989 Savings and Loan Crisis and the 1990-1991 recession.(Source: CNBC, Stock Market Crash 1987 and 1929, October 17, 2007; CNBC, Charting the Dow), October 17, 2007)
Black Monday 1929Black Monday also refers to the first Monday after Black Thursday, which kicked off the Stock Market Crash of 1929. On Black Monday, stocks fell 13% -- not really a significant loss. However, it followed the 11% decline experienced a few days earlier, on Black Thursday. The next day was Black Tuesday, when the stock market lost the rest of gains it had made during the entire year.
This, in and of itself, was not enough to start the Great Depression of 1929. However, it set the stage by shattering confidence in business investing. As people realized that banks had used their savings to invest on Wall Street, they rushed to take out their deposits. Banks closed over the weekend, and then only gave out ten cents on the dollar. Many people who had never invested in the stock market also lost their life savings. Banks without deposits went out of business, so businesses couldn't get loans and people couldn't buy houses. Wall Street investors turned to gold, driving up gold prices. Since the dollar was backed by the gold standard, people turned in dollars for gold, depleting reserves. In response, the Federal Reserve raised interest rates to protect the value of the dollar. This contractionary monetary policy further aggravated the downward economic spiral.