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On This Day: Dow Jones Drops 23 Percent in Stock Market Crash of 1987

October 19, 2011 06:00 AM
by findingDulcinea Staff
On Oct. 19, 1987, a day known as “Black Monday,” the Dow Jones Industrial Average had its largest-ever single-day drop. The crash produced fears of a long-term recession, but the market recovered quickly.

The Stock Market Crash of 1987

Between August 1982 and 1987, Wall Street had one of its greatest periods of growth. The Dow Jones Industrial Average rose from 776.92 points in 1982 to a peak of 2722.42 in 1987, an increase of nearly 250 percent.

An August 1987 article in Time reported that the “current bull market is unlike any in the memory of the most seasoned stock traders: there has never been one that has whirled up so fast for so long with so little interruption. … To many brokers and investors, it is all getting rather scary. How long, they ask, can the market keep going up and up in a straight line?”

The bull market came to a crashing end that October. Between Oct. 2 and Oct. 16, the Dow fell 15 percent, culminating with a record 95.46-point drop on Oct. 14, a 57.61-point drop the following day and a new record-108.35-pont drop on the 16th, a Friday. The drops were blamed on the announcement of a larger-than-expected U.S. trade deficit on the 14th and an Iranian attack on a U.S. tanker in Kuwait.

Over the weekend, many analysts worried about what would happen when the market re-opened on Monday. Leo Melamed, former chairman of the Chicago Mercantile Exchange, recalls, “That weekend, the press carried a great deal of stories which in fact increased the fear of the participants that, in fact, there had been a signal and that everybody that was in the market, was thinking in terms of ‘Well, on Monday, I think I’ll take my profits.’ That weekend, I myself was scared of the headlines.”

On Monday, Oct. 19, the market crashed, as the Dow dropped 508 points, or 22.6 percent in value, both records. Foreign stock exchanges also posted massive losses. The day became known as “Black Monday.”

“The stock market's incredible decline, analysts said, might have repercussions far beyond the immediate ones. The stock market has often portended economic declines,” wrote The New York Times. “What a decline such as has occurred may mean is hard to imagine.”

Despite fears of a recession, the stock market quickly rebounded. The Dow made record gains on Tuesday and again on Thursday. It closed 1987 higher than it had been at the start of the year, and reached its pre-Black Monday level just two years after the crash.

Causes of the Stock Market Crash

There are several theories for the crash. The simplest is that the market had gone too high and the steep declines of October were a swift correction of the market. Another popular theory is that the crash was exacerbated by the prevalence of computer programs that were programmed to sell stocks if they went below a certain price.

History News Network provides short explanations of common theories.

CNBC asked those who experienced the crash from Wall Street and Washington for their opinions on what caused the crash and whether it could happen again.

Related: The Stock Market Crash of 1929

The 1987 “Black Monday” crash was even larger than the “Black Tuesday” crash of 1929, the most famous and debilitating stock market collapse in U.S. history. On that day, the market fell 12 percent for the second straight day, causing many companies to become worthless. The market was unable to recover, and the U.S. sunk into the decade-long Great Depression.

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