This clear guide for new investors will help you understand the 1987 stock market crash, its triggers, consequences, and the structural reforms that followed.
Black Monday: causes, impact and historical context
Black Monday refers to the stock market crash that occurred on Monday, 19 October 1987.
To this day, Black Monday is remembered as one of the most symbolic and historic market crashes, often cited as a benchmark when significant market declines occur.
This article explains the background, impact and frequently asked questions related to Black Monday.
When did Black Monday happen?
Black Monday occurred on Monday, 19 October 1987.
Triggered by a massive sell-off in the US market, global stock markets, including those in Asia, experienced a chain reaction of declines the day after, 20 October.
Dow Jones chart around Black Monday. Source: TradingView. The information presented is historical information and past performance is not indicative of future results.
The daily chart above shows the movement of the Dow Jones Industrial Average (DJIA) from July 1987 to February 1988.
The sharp drop in the middle of the chart highlights Black Monday, when the DJIA fell by 22.6% compared to the previous Friday’s close.
Why it is called Black Monday
On 24 September 1869, plummeting gold prices in the United States triggered a market panic, which became known as “Black Friday.”
Since then, major stock market crashes have often been referred to using the word “Black” followed by the day of the week.
Accordingly, the crash that occurred on Monday, 19 October 1987, became known as “Black Monday”.
Main causes and background
Black Monday cannot be attributed to one cause but rather a combination of complex factors.
Here we outline the main contributing elements:
Overheated stock prices
Between 1982 and 1987, the US experienced strong economic growth and deregulation, which led to soaring stock prices.
The DJIA tripled during this period, and valuations far exceeded the actual economy and corporate earnings.
This created concerns about an overheated market.
Rising interest rates
In the 1980s, the US was burdened with twin deficits — fiscal and current account — which pushed long-term interest rates higher.
In the autumn of 1987, the Federal Reserve signalled a more restrictive monetary stance.
This heightened concern about rising interest rates triggered equity sell-offs.
Concerns over the weakening dollar
In the early 1980s, the US dollar was considered excessively strong and unreflective of global economic conditions.
This led to the 1985 Plaza Accord, an international agreement to lower the value of the US dollar and correct trade imbalances among the G5 nations.
Although the 1987 Louvre Accord aimed to halt excessive depreciation, the dollar continued to weaken, raising concerns in global financial markets.
Impact of programme trading
One factor that accelerated the downturn was programme trading by institutional investors.
Programme trading refers to computerised, automatically executed trading decisions that do not rely on human judgment for each transaction.
As investor sentiment worsened in an already overheated market, automated sell orders triggered a cascade of further selling.
Panic selling
The rapid market decline caused widespread panic among investors, leading to a surge in sell orders.
With buy orders failing to match the volume of sell orders, prices dropped sharply, heightening the crash.
Effect of Black Monday
Below, we summarise the various impacts of Black Monday.
Global stock market crash
As noted above, the DJIA fell by 22.6%, and the S&P 500 declined by 20.5%.
According to the Nikkei, on October 20, 1987, the Nikkei 225 recorded a sharp drop of 3,836 JPY from the previous day, a fall of 14.9%.
Based on CEIC data, the Straits Times Index (STI) in Singapore fell by as much as 40.7% when comparing its closing prices from September and October 1987.
It took some 18 to 24 months for the DJIA to return to its pre-crash level of around 2,700 points.
Introduction of circuit breakers
In response to Black Monday, the New York Stock Exchange (NYSE) introduced the circuit breaker system.
This mechanism temporarily halts trading if the S&P 500 drops by a specific percentage — 7%, 13% or 20% — compared to the previous day’s close.
These pauses are designed to give market participants time to assess market conditions.
Frequently asked questions
The weekly chart above shows the DJIA from 1986 to 1990. Source: TradingView. The information presented is historical information and past performance is not indicative of future results.
Following the crash, it took about two years for the DJIA to return to its previous level.
Although the index experienced a sharp drop due to Black Monday, it had recovered by the first half of the following year.
Subsequently, the Japanese stock market entered a period of further growth driven by the asset price bubble.
In September 1987, the Straits Times Index was in the low 1,200s. Following the Black Monday crash, it took approximately two years for the index to return to its pre-crash level, similar to the DJIA. By the end of 1989, it had risen to 1,481.33 points, surpassing its previous level.
Summary
Black Monday refers to the stock market crash on Monday, 19 October 1987.
The US market collapse triggered a global chain reaction, with the DJIA falling by 22.6% and the Nikkei 225 by 14.9%.
This event profoundly impacted global markets, prompting the NYSE to introduce circuit breakers to prevent similar occurrences.
This article and its contents are intended for educational purposes only and should not be considered trading advice.
