A Brief History of Black Monday

by Michael Quiel

On October 19, 1987, the Dow Jones Industrial Average dropped by more than 500 points, for a loss of 22.6 percent of its total value. The same day, the S& P 500 dropped 20.4 percent. At the time, this was the biggest loss Wall Street had ever seen in a single 24-hour period. That day has since come to be known as Black Monday. Many financial professionals worried that this drastic drop would precipitate a recession like the one following the crash of 1929 but, in fact, the American economy recovered relatively quickly, with the Dow regaining all of its value within two years.

The crash affected countries around the world, beginning in Hong Kong and spreading quickly throughout Europe and the United States. American markets were among the less affected, with a total fall of 22.68 percent, as compared to Hong Kong’s 45.5 percent loss and Australia’s 41.8 percent drop.

The cause of the crash remains a subject of some debate among scholars, and even today, no strong consensus has been reached. Economists have theorized that the decline was caused by market psychology, program trading, overvaluation, and illiquidity, but the most popular explanation has proved to be program trading. Program traders buy and sell stocks rapidly through computer programs based on external inputs, including the prices of securities and other measures. It is possible that these automated programs caused the market to cascade down rather than correcting itself, because the computers failed to react as human traders might have.

About the author: With more than 20 years of experience in investment banking, Michael Quiel has served since 1999 as the President of Legend Advisory Corporation, a consulting firm through which Mr. Quiel has assisted in more than $200 million in equity and debt financing. Michael Quiel began his career in finance as a stockbroker in 1987 and witnessed Black Monday firsthand.