Remembering Black Monday On Its 30th Anniversary: Is A Similar Stock Market Crash Possible?

Today marks the 30th anniversary of “Black Monday,” the stock market crash that happened on October 19, 1987, and things couldn’t be more different in today’s Wall Street climate, with the Dow Jones Industrial Average breaking the 23,000 mark for the first time ever on Wednesday. But many industry veterans still remember the day when the Dow lost a whopping 22.6 percent, marking the largest single-day decline in percentage in the blue-chip index’s history.

In an op-ed for the San Diego Union-Tribune, Chris Reed wrote that there were numerous theories that sought to explain why Black Monday happened. Geopolitical issues were cited by many as a possible cause, as there were fears of a war between the United States and the Middle East and a possible trade war with West Germany. The computerization of trading was also theorized, as this supposedly resulted in early sales and “panic among institutional investors.” And in an even more interesting theory, journalist Tim Metz posited in the book Black Monday: The Catastrophe of October 19, 1987… and Beyond that government regulators and other “market makers” allegedly rigged trading in a previously undetected “market manipulation scheme.”

Regardless of why Black Monday happened, its 30th anniversary is bringing concern to some financial experts who believe that a correction may be forthcoming after a nine-year bull run, a boom period that continues to this day. According to Reuters, modern trading technology and stock market trading reforms have greatly minimized the chances of another big crash taking place, but some traders appear to believe in the old adage of “never say never.”

“We have learned a lot from the mistakes of the past in terms of the reaction or overreaction,” Ken Polcari, director of the New York Stock Exchange floor division at O’Neil Securities, told Reuters.

Black Monday represented the largest single-day percentage drop in Dow Jones history. [Image by Peter Morgan/AP Images]

USA Today also noted that there are several things that could go wrong in the modern-day financial setting and result in another major stock market crash. These include a computer trading algorithm going haywire, cyberattacks on stock exchanges, market pricing systems, or financial institutions, or a significant “malfunction” to trading systems that could cause investors to lose confidence.

Putting things in perspective on Black Monday’s 30th anniversary, that would mean a drop of over 5,200 from Wednesday’s record-high close of 23,158, should the Dow lose another 22.6 percent. And in the words of Themis Trading co-founder and co-head of equity trading Joe Saluzzi, present-day technology might not be enough to prevent the stock market from nosediving like it did exactly 30 years ago to this day.

“We have an electronic market today, and things can get out of control very quickly.”

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Even with such risks in mind, both USA Today and Reuters noted that most experts don’t see the stock market being as vulnerable as it was in the run-up to Black Monday in 1987. For example, interest rates are now trending more favorably for stocks; 10-year Treasury yields were at around 10 percent this month, as opposed to only 2.34 percent around the time Black Monday happened 30 years ago. Also, the year-to-date gains of 14 percent at the present suggest a market that isn’t half as frothy as it was right before Black Monday, when gains were close to 40 percent.

“We believe that the stock market stands on a much stronger foundation than it did in October 1987, making another crash like 1987 appear unlikely,” said LPL Financial strategist Ryan Detrick, as quoted by USA Today.

Speaking to Reuters, Wunderlich Securities chief market strategist Art Hogan expressed similar sentiments, stating that today’s financial authorities can “shut things down for a period of time,” allowing them to take stock of the situation and get things back on track after a big stock market crash.

In their retrospective pieces on Black Monday’s 30th anniversary, both USA Today and Reuters referenced the May 2010 “flash crash” as an example of a quick and unexpected price decline that could happen on rare occasions, but not result in any long-term damage. Reuters added that there are now financial “safeguards” in place that could likely avert another stock market crash similar to Black Monday. But even with these safeguards, traders are still wary about the potential of a catastrophic crash taking place, especially with the current market froth and the many moving parts that could cause investors to panic.

[Featured Image by Spencer Platt/Getty Images]