October is known for many things, with incredible market crashes likely being at the top of the list. The Crashes of 1929 and 1987 stand out for many investors and who could forget the selling and volatility of October 2008?
In honor of the greatest drop in stock market history, we’ll take a closer look at the crash of 1987. On Monday, October 19, 1987, the Dow fell 22.6% for the largest one-day drop in the more than 126-year history of the Dow. To this day it is still the largest percentage drop ever, but it now ranks as the 97th largest point decline.
What caused it? The funny thing is that 35 years later I’m not sure everyone can officially agree. Here are some things to know about the Crash of 1987:
- For starters, stocks were in the midst of a huge run off the August 1982 lows, with the Dow up more than 40% for the year in early August 1987, amounting to one stretched rubber band.
- Then consider Alan Greenspan took over the Federal Reserve Bank in August and to cool things off, was hiking rates. Talk about a bad time to start a new job.
- Program trading was blamed as well, with Louis Rukeyser the Friday night before the crash pointing out issues with program trading. (Simply put, program trading meant stocks were liquidated as certain levels were hit. It worked fine until stocks began to fall more than ever expected, leading to more selling as prices dropped.)
- Currency markets were on edge as well, as the U.S. wanted Germany to weaken their currency due to the latest trade deficit numbers. The back and forth was all over the media, as recently as the Sunday before the crash.
- The selling started earlier actually, as the three days before the crash the Dow was down 3.8%, 2.4%, and 4.6%, making it safe to say investors were on edge all weekend for how things might open on Monday morning.
In the end, the Dow fell a then record 508 points for a 22.6% one-day decline, topping the previous largest one-day decline of 20.5% in December 1914, when the Dow began trading after being halted for nearly five months due to World War I.
Something most investors might not know is that stocks still finished the year in the green in 1987. Sure, they were well off their highs and the huge volatility was too much for many investors to handle, but if all you saw was the yearly gain of 2% in 1987, you’d think it was a boring year!
We might not know what caused the Crash of 1987, but we also still don’t know what caused the Flash Crash either. The Flash Crash occurred in May 2010 (when many stocks and ETFs lost huge values, only to regain the losses by the close for one wild few minutes of trading). The truth is with more and more computers involved, we are due to get big swings periodically. March 2020 saw some of the largest swings of all time (seven of the 10 largest point declines ever took place during this year), putting major stress on the system.
Today we do have circuit breakers in place to help calm nerves should we see another major decline in prices, but it’ll take a huge drop for those to kick in.
In the end, volatility is the price of admission and although we think we are much closer to a major low in stocks currently, should we all have the privilege to invest long enough, there will likely be another day stocks fall significantly. And when they do, just remember that the Dow started trading on May 24, 1896, and it has seen wars, famines, pandemics, inflation, deflation, booms and busts, and more. Yet, it has always eventually come back to new highs and we don’t think this time will be any different.
