At the time of its occurrence, this was the largest one-day market crash in US history. The Dow Jones Industrial Average declined by 22.6%, which was equal to $500 billion dollars on the Monday of October 19th 1987.All of the major 23 world markets at the time experienced a decline of at least 20%. When losses from this recession are measured in a common currency, the cumulative losses total approximately $1.7 trillion!
In both 1986, and 1987, the United States stock market achieved impressive gains. These particular years were an extension of a bull market that had begun in 1982, which was driven by low interest rates, hostile takeovers of companies like Revlon where corporate raiders like Michael Milken played a prominent role, the serial merging of corporations, and leveraged buyouts.
The underlying corporate way of thinking at this time was influenced by the assumption that companies would be able to achieve exponential growth in value if they continued to acquire other companies. In leveraged buyouts, one particular company would raise funds to acquire another company by selling bonds with a low investment grade. These types of bonds are called junk bonds because they offer a high yield due to their high probability of default. Capital raised through such a process would be used in the acquisition of the target company. Initial Public Offerings were also increasing in prominence during this time.
Another notable trend in the 1980s was the growth in the use of personal computers. People saw the potential that personal computers offered to create interesting business opportunities, and increase the efficiency associated with certain business tasks like accounting. As this interest in computers increased, the population of America was caught in a euphoria associated with other bubbles of note. The growth in interest and the usage of personal computers played a significant role regarding the blame that people gave to the role of automated trading in the stock market crash of 1987. Whether this was the case is an issue that is still debated up to this day.
Some market participants attribute the stock market crash of 1987 to the decline in oil prices that was caused by a dispute between the Organization for Petroleum Exporting Countries (OPEC) members. This decline in the global price of oil, as caused by the dispute, was because of Saudi Arabia’s frustration with the other members not agreeing with the production quotas which had been given. In the year preceding the stock market crash of 1987, Saudi Arabia stopped honoring their production quota commitments to the cartel, and this led to the significant decline in the price of oil.
The decline in the price of oil is said to foreshadow a decline the value of the stock market, according to a study published by Tom Therramus in 2009. According to this analysis, almost all of the recessions and market crashes of the last 50 years happened quickly after a sudden change in the price of oil. This pattern was repeated once again in 2008, and again in 2015.
My personal view would be that, instead of attributing to the decline in the Dow Jones Industrial Average to one particular cause, be it a mature bull market, or the usage of automated trading, the decline should be seen as caused by the confluence of the factors mentioned in this article. With this in mind, it is important to keep an open perspective when analyzing what caused a market crash so as to have the right mindset to spot the same factors if they repeat themselves in future. Complement this article with the following video.
References
Black Monday, thebubblebubble.com
Black Monday, Wikipedia.com
Michael Milken, Forbes.com
What is a Leveraged Buyout, wallstreetoasis.com
OPEC, opec.org
History of Algorithmic Trading, A brave new world: 1980s home computer
Will Collapse of Oil Price Cause a Recession, ourworld.unu.edu
Confluence, Wikipedia.com
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