On October 19, 1987, a bizarre and completely unprecedented set of events unfolded in America’s financial markets. In New York, the brokerage firm Donaldson, Lufkin & Jenrette posted uniformed security guards outside its office, fearing armed conflict with its clients. In San Francisco, a precious-metals and foreign-currency firm sold its entire stock of Krugerrands and American Eagle gold coins. At the New York Stock Exchange, executives of a Las Vegas company called Jackpot Enterprises tried to celebrate their new listing amid reports that floor traders were fainting.
For the preceding seven weeks, the stock market had been skidding. Now, on this sunny Monday, it was on the verge of total collapse. When the day was over, the Dow Jones Industrial Average had lost more than 500 points, or 22.6 percent of its value—the equivalent of a drop of about 3000 points today. A half-trillion dollars in wealth disappeared overnight—equivalent at the time to the entire gross domestic product of France. On the heels of the decline, a recession was considered a near certainty and a depression a distinct possibility. After all, on the worst previous day, October 28, 1929, the market had dropped just 13 percent. Now, 58 years later, a New York bar was serving a mixed drink of dark rum and black Sambuca called “Black Monday,” the same term applied to the previous crash.
The size and speed of the 1987 decline were breathtaking. So was the very fact that it happened: the U.S. economy was strong, and there had been no major destabilizing events. No terrorist attack, no presidential assassination, no failure of a major bank or brokerage firm. While there was apprehension, only a few analysts were predicting a major market downturn, and no one called a crash of this size.
Studies of Black Monday soon became a growth business, but none of them ever provided a convincing explanation of precisely why the market fell so far so quickly. Today, 20 years later, we don’t know much more about the causes of the crash than we did when it happened. Once again, we could be caught by surprise.
I decided to talk with some of the country’s leading market watchers, as well as with those who participated in the 1987 events, to see how their thinking has evolved over the past two decades. What was the explanation for Black Monday?
A must read for all market participants.