It was twenty years ago today Black Monday when the Dow Jones Industrial Average declined 508 points, or 22.6 percent, on a record volume of 600 million shares, three times the previous volume record. The equivalent numbers today would be more than 3000 points on the Dow and a volume of around fifteen billion.The market had been very strong for months. It began 1987 at 1985 and on August 25 reached its peak at 2722, up 44 percent for the year. But the next two months were volatile, to put it mildly, with the market trending downwards, a pattern reminiscent of 1929. On Wednesday, October 16th, it fell 95.46, a record in point terms. The next day it fell 58 points and on Friday 108.35.
At the opening bell on Monday, October 19, all hell broke loose. The crash had actually begun in Far Eastern markets, especially Hong Kong, and rolled around the globe, hitting Europe before New York. By the start of trading, sell orders were piled high in brokerage offices and many stocks could not open on time because of the imbalance. When the futures markets opened in Chicago, they added to the sell pressure. At midday rumors hit the Street (Wall Street has long had the world’s most efficient rumor mills) that the chairman of the SEC had suggested the Exchange shut down temporarily. This exacerbated the panic as traders rushed to avoid having exposed positions with no way to close them.
No one knew what to expect the next day, but while volume was again extraordinarily high, the market stabilized by noon, and October 20 would prove the low for the year. The market began to recover in December. Within two years it had recovered its 1987 high, and it is now more than ten thousand points higher.
The causes of the great crash of 1987 are still much in dispute. Why it didn’t presage a depression, as previous stock market crashes had always done, is less so. For one thing, the extraordinary technological possibilities of the microprocessor were just beginning to be exploited, and they would open a floodgate of profits as they were. We have not begun to see the end of that tide. The Internet did not even exist in its modern sense twenty years ago. For another, for the first time since 1792, the federal monetary authorities, in this case the Federal Reserve, did what such authorities need to do in such situations: they flooded the Street with liquidity.
Will such a crash happen again? Undoubtedly. It is a commonplace that Wall Street knows only two emotions, fear and greed, and can switch between them in the blink of an eye. Roughly every twenty years, apparently the length of time it takes to forget the lessons of the past in 1819, 1837, 1857, 1873, 1893, 1907, and 1929 we had great crashes. Then it was almost sixty years until 1987.
Human beings haven’t changed, but the financial world is very different than it was twenty years ago. Increasing globalization and decreasing national barriers are ever more tightly integrating world markets. The Internet makes it possible to trade stocks from anywhere in the world. Sharply reduced brokerage commissions have encouraged frequent trading. Fast-spreading wealth has greatly increased the number of traders. And new instruments and derivatives have still uncertain effects on the market. Most of all, the amount of information available in real time is now staggering. Michael Bloomberg became one of the richest men in the world by providing a means of accessing and manipulating that information in ways that were inconceivable twenty years ago.
As Bette Davis said in All About Eve, “Fasten your seat belts. It’s going to be a bumpy night.”
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