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What is Black Monday?
Black Monday is the name given to a devastating worldwide stock market crash that occurred on Oct. 19, 1987. The event represents the largest one-day decline ever in the Dow Jones industrial average (DJIA), which fell 508 points, or 22.6 percent. Other major stock markets saw similarly huge declines. The term also is sometimes used to refer to the stock market crash on Oct. 28, 1929, which helped start the Great Depression.
Asset bubbles and stock market crashes are a regular feature of the business cycle, and in certain cases can lead to a recession. The Black Monday crash in October 1987 was so significant that the DJIA did not recover to the level it was at before the crash for two years. The crash had global and long-term effects, with major exchanges around the world falling by at least 20 percent by the end of October.
The U.S. Securities and Exchange Commission (SEC) attributed the crash to fears about a bill introduced in the U.S. House of Representatives’ Committee on Ways and Means. This anti-takeover bill, introduced on Oct. 13 and passed on Oct. 15, proposed doing away with loans used to fund corporate takeovers. It was also intended to help Congress better regulate the markets.
The bill caused massive fear among stock market investors, and in the three days between the bill’s introduction and its passage, stock prices dropped by more than 10 percent. There were other factors contributing to Black Monday in 1987, including unrest in the Middle East and a crackdown on corruption and insider trading. The growth in computer-driven, programmatic trading is also cited as a contributing factor in the crash.
To help compensate for the massive drop in the market, the Federal Reserve began directing money into the nation’s banks. The stock market soon became stable, and by the end of October 1987, the Dow had risen 15 percent. A recession was not directly caused by the crash. However, the incident set the stage for two more economic crises: the savings and loan crisis of 1989 and the recession that occurred between 1990 and 1991.
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Black Monday example
With stock markets, it’s important to remember that the comparative size of a gain or loss over a period of time is judged on the percentage change, rather than the absolute number of points gained or lost. On Aug. 24, 2015, during a period of upheaval in Chinese stock markets, the DJIA closed the day down 588 points (it had been down as many as 1,000 points at its lowest point). At that time, it was the eighth worst one-day loss in the history of the index on a percentage basis, but in absolute points it was a bigger loss than Black Monday! On that day, the DJIA fell only 5 percent, while on Oct. 19, 1987, a drop of 508 points equaled a 22.6 percent decline — a much, much larger share of the overall index.
Learn more about the stock exchange and its influence on the economy.