The Dow-Jones and the “Black Monday” of 1987

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In recent memory, there have been a number of significant recessions, and a few major upsets in our markets. One of the most intriguing events of our time is the stock market crash of October 19th, 1987, more easily recognized by the moniker of “Black Monday”. In that one day, the Dow-Jones Industrial Average lost over 508 points, equating to a 22.6% loss, or approximately $500 billion (Beattie 2012). This makes it, to date, the largest one-day percentage decline in Dow-Jones history. Here we shall discuss how it came to pass, through the topic of the economic climate and emerging trading practices of the 1980’s preceding the crash, heavily focusing on program trading, as well as a bit of the market psychology, and the remedial actions and consequences involved with Black Monday. The 1980’s saw the end of the oil crisis and recession of the mid-late 1970’s, and a rapid recovery took place. By the mid-80’s, notably 1986, the year preceding the Black Monday crash, the economy switched gears to slow growth instead of rapid recovery, with the rate of inflation falling (Inflation.eu 2012). The stock markets entered 1987 with the Dow-Jones at 1897 points, and reaching a high of 2722 points August 25th, a 44% rise over the previous year’s closing of 1895 points (Bulkowski 2011). Investors came to the market with bullish attitudes, buying into companies with little research into the financials, and companies grew by leaps instead of steps through the prevalence of mergers & acquisitions, through hostile take-overs and “greenmailing” (Beattie 2012). The emergence of computerized trading became a normality, and even a dependency for the modern 80’s trader. Some refer to these times as the “Reagan Bull Market”. However, the early part of 1987 saw the Securities and Exchange Commission holding massive inquiries about insider trading, especially in light of characters such as

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