The Market Crash, 33 Years On

Today is the 33rd anniversary of the 1987 stock market crash. As it turns out, that crash happened on a Monday.

The Dow fell 508 points for a total loss of over 22.6%. That was the largest drop in market history. Today, that would be like a drop of more than 6,000 points.

In fact, with the modern circuit breakers, that record may never be broken. Today, if the market falls over 20%, then the exchange is shut down for the day.

People often ask, “so what caused the crash?” At the time, the popular answer was program trading. But that’s misleading. A number of very unusual events happened just before the crash.

For example, over that weekend in 1987, parts of England were hit with the worst storm in 300 years. The intensity of the storm caught forecasters off guard.

That weekend, James Baker had gone on the Sunday talk shows and criticized Germany for its recent rate hike. An unnamed Treasury official said that we would “drive the dollar down” if necessary. This led European markets to fall on Monday.

Also, a tax bill had just been introduced in the House Ways and Means Committee that would severely limit tax deductions for interest paid on debt used to finance mergers or hostile takeovers (which had been running rampant throughout 1987).

Alan Greenspan was new on the job as Fed chair, and he raised interest rates just before the crash.

The day of the crash, many stocks couldn’t open for trading, yet the futures markets were working. As a result, a big gap opened between the two. By 10 am, 95 S&P 500 stocks, representing 30% of the index, were still not open.

With the 1987 crash, the market temporarily gave back its recent gains. Here I’ve altered the chart slightly, and it doesn’t look so unusual:

If you had been Rip Van Winkle and slept though the whole thing, the chart above would look perfectly normal. Fortunately, the market break had little impact on GDP:

Starting from the day before the crash, the Wilshire 5000 Total Return Index is up 30 fold.

Posted by on October 19th, 2020 at 11:11 am


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