When most people think about a disastrous historic stock mark crash, their minds go toward the 1929 crash that kick-started the Great Depression. Anything that began an era called the Great Depression had to be the worst, right? In actuality, the worst stock market crash in American history wasn't Black Tuesday but Black Monday and it came many years later in 1987.
The 1987 stock market crash saw stocks drop twice as low as they did in '29, and the Black Monday effects can still be felt today. In fact, despite the devastation of the crash, little to no reforms were made (this is one of the reasons the 2008 crash was able to happen, although on a much smaller, but still quite devastating, scale). The 1987 stock market crash recovery took two years to reach a new closing high, but as recent repeated history would show, lessons were all too quickly forgotten.
- Photo: Wikimedia Commons
Black Monday Was Twice As Bad As Black Tuesday
Black Monday is thusly named because on that day Wall Street saw the largest percentage declines in history since its inception. For perspective, on an average day the Dow will go up or down around a few tenths of a percentage point. In 1929 it went down 13% but 1987's Black Monday saw a 22.6% one-day decline. While 2008 had greater overall declines, no single day has ever compared to the decline experienced on October 19, 1987.
Black Monday Led To A Better Understanding Of The World Market
Although Black Monday, which occurred on October 19, 1987, was a devastating market crash for the U.S., but it also highlighted a new concept of globalization. The crash led people to see the ways global markets interacted with and affected each other. Suddenly people understood they needed to be paying more attention to how markets outside of the US were faring, such as looking to Asian markets to see how their successes and failings would ripple over to the US market.
The 1987 And 2008 Crashes Were Eerily Similar
One would think that after such a devastating crash, the market would change somehow, and it did, but only slightly. The fact that so few reforms were made to the market after 1987 contributed directly to the 2008 crash, which led to a major recession in the US. The increasingly large scale of the unified market was put into the hands of bankers, insurers, investors, and brokerage firms who had previously had a much smaller jurisdiction. Panic spread after the crash, causing a ripple effect, and the players involved were unequipped to deal with the enormity of the problem.
The primary cause of the 1987 crash was financial derivatives and "The cross-market strategies used by these big investors linked the futures, options, and stock markets together in ways that were unforeseen and unprecedented." This betting on the future approach is precisely what caused the 2008 crash.
- Photo: Wall Street/20th Century Fox
Wall Street Had Become So Glamorized People Were Numb To How Easily It Could Crash
It makes sense that people tend to focus on extremes, which is part of what can contribute to a stock market crash such as that of '87. Which is important to keep in mind to prevent a similar crash in the future. Unfortunately, in 1987 the public's attention was entirely focused on Wall Street leading up to the crash. A book depicting Wall Street excess was a bestseller (The Bonfire of the Vanities) and a film (Wall Street) depicting cutthroat stock trader Gordon Gekko (Michael Dougals) was in production during the crash and premiered in December 1987.
After The Crash, Critical Advice That Could Have Helped Avoid 2008's Crash Was Ignored
Despite the confusion and panic that stemmed from the crash, the government worked hard to implement new policies and introduce strong leaders. New York Federal Reserve Bank President E. Gerald Corrigan and New York Stock Exchange Chairman John J. Phelan Jr. were among those to lead the way to recovery.
In addition, Nicholas F. Brady led a commission that encouraged a regulator be instated to take action when they noticed notable risk emerging from the combined markets. Diana B. Henriques wrote for The Atlantic:
"In the aftermath of 1987, a blue-ribbon commission led by Nicholas F. Brady—a Wall Street veteran, a former New Jersey Republican senator, and a future Treasury secretary—tried to persuade Washington to adapt to the fundamentally new fact that the individual markets for stocks, futures, and options now, for all practical purposes, made up a single marketplace. The Brady commission urged that a single regulator be empowered to take a comprehensive view of this newly unified market and to act whenever and wherever a systemic risk emerged."
This exact advice was suggested in the aftermath of 2008's crash, as well.
Warning Signs Have Been Cropping Up That Foretell Another Possibly Imminent Crash
According to ABC, there are many similarities in our current economy that resemble those leading up to Black Monday. A few of these include: "Surging oil prices. A slowing economy. Stocks near records in an aging bull market. Volatility on the rise." Yeah, a few of these, especially that last one, sound familiar.
It may be slightly reassuring that crashes of that magnitude are rare. Although, it is important to note that when it comes to the stock market, you can never truly predict where it's going to go. Plus the lack of reform change since Black Monday means no one is watching out for and helping the avoidance of another major crash.