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Black Monday and Stock Market Crashes Explained
Black Monday refers to the stock market crash that occurred on Oct. 19, 1987 when the DJIA lost almost 22% in a single day, triggering a global stock market decline.
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The term "Black Monday" refers to the October 19, 1987, stock market meltdown that was both abrupt and catastrophic. When the US stock market index known as the Dow Jones Industrial Average (DJIA) dropped by more than 22%, investors panicked. There were two preceding big decreases in the week leading up to the disaster.
As the first day of a worldwide stock market crash, "Black Monday" has gone down in history. It remains one of the most notorious trading days ever.
Computers at the time just couldn't handle the unexpected surge in trade activity on the exchanges. Large money transfers took longer than usual, and orders were unfulfilled for hours.
The futures and options markets always react similarly after a large market meltdown. The whole financial system felt the effects of the catastrophe as well. By the end of that same month, most major global indices had fallen by between 20 and 30 percent.
The 1987 market meltdown is often thought of when the phrase "Black Monday" is used. Although it is most often associated with the 2008 financial crisis, the term is also used to describe past major market collapses.
What causes market crashes?
Stock market collapses often have several underlying causes. Surprisingly, there had been no major news stories preceding Black Monday 1987.However, a number of variables converged, leading to widespread fear and confusion. But what exactly were these variables?
The first was the advent of electronic trading platforms. Despite the fact that computers now play a central role in the trading process, this wasn't always the case. Prior to the 1980s, stock exchanges were often noisy, congested places where dealers made all of their transactions in person.
New York Stock Exchange (NYSE) trading floor, 1963, before the advent of electronic trading systems. Documents obtained from the Library of Congress. Changes were made to the original image.
Then there's the issue of sex.The information comes from the Library of Congress. Contrast and brightness have been adjusted from the original image.
As the 1980s progressed, however, traders increasingly relied on electronic programs. Thousands of orders may be placed in a matter of seconds because of the increased speed made possible by the advent of automated trading. Large price swings were also impacted by these developments. Trading bots of today, however, may shift billions of dollars' worth of value within seconds following an unforeseen news occurrence.
It has been suggested that the United States' trade imbalance, global tensions, and other geopolitical reasons are to blame. More people were exposed to the incident as a result of the expanding media's reach, which undoubtedly increased the intensity of the aftermath.
It's important to remember that even if these things did have a role in the disaster, ultimately it was human beings who made the decisions. Sell-offs in the market are frequently the simple outcome of widespread fear, which is heavily influenced by market psychology.
What is a circuit breaker?
As a direct result of the chaos that ensued on "Black Monday," the US Securities and Exchange Commission (SEC) implemented a number of safeguards to prevent another market crash from happening. At the very least, we can work to lessen the damage they do if we can't stop them altogether.
Among these options is something called a circuit breaker. When the price exceeds a specific percentage above or below the daily open, trading is halted as a regulatory precaution. While the United States is the primary focus, circuit breakers have found use in many other countries as well.
Major market indices like the Dow and the S&P 500, as well as individual equities, are subject to circuit breakers. See how they function below!
Trading is suspended for 15 minutes and then resumed if the S&P 500 drops more than 7% in a single trading day. Specifically, this is a "Level 1" circuit breaker. Again, trading will be suspended if the market falls by 13% from the day's start. Specifically, this is a "Level 2" breaker. The market closes for 15 minutes, and then it reopens. If the price falls by 20% from the opening price, trading is suspended for the remainder of the day. Specifically, this is a "Level 3" breaker.
Advantages and disadvantages of circuit breakers
There is debate about whether or not circuit breakers should be used to avoid flash crashes, despite the fact that they may be successful at doing so.
Some people say that circuit breakers are bad for the markets and that they make crashes worse. How so? Given that these percentage thresholds are tied to the opening of the market, anybody may access this information. As a result, they may influence order placement and reduce liquidity in the order book artificially at specific prices.
In the event of a sudden increase in supply, there may not be enough orders to meet demand, leading to increased volatility. Some have argued that the markets would be more stable if they were not influenced by circuit breakers in key regions of liquidity.
Circuit breakers are only tripped by declines in major stock market indices like the S&P 500. However, they may also be triggered on individual securities when they see a price increase.
How to Prepare for Stock Market Crash
Crashing occurs often because of how markets work and how people behave in large groups. However, what can you do to safeguard yourself from a stock market crash?
Take the time to formulate a strategy for long-term investing or generalized trading. Even when many investors are selling in a panic, you should keep your cool and make decisions based on facts. That can't be done without first developing a long-term investment plan or trading strategy, which should constrain emotional trading.
Stop-loss orders are another factor to think about. One of the most important things you can do as a trader is to limit your losses on deals with a shorter time horizon. Surprisingly, though, this is not as typical among investors with a longer time horizon. Stop-losses that allow for bigger price movements may nevertheless protect you from catastrophic losses in the event of a market meltdown.
So far, every drop in the value of the global market has been short-lived. Despite the fact that economic downturns may last for years, market conditions often improve again. If you go back far enough, you'll see that the global economy has been expanding steadily for millennia, with periodic dips in the road representing minor hiccups.
If you're talking about global stock markets that are directly related to GDP growth, then you could be right. But if you're talking about cryptocurrency markets, then you're wrong. Blockchain technology is in its infancy, and cryptocurrencies are a volatile investment option. Therefore, following a catastrophic market crisis, certain cryptoassets may never recover.
Other notable Black Mondays
October 28th, 1929
Losses in the stock market in the 1930s foreshadowed the Great Depression. The stock market collapse that occurred in the fall of 1929 was the most catastrophic in terms of long-term economic implications.
September 29th, 2008
The stock market began to fall once the US housing bubble broke. As a consequence, the Great Recession hit the economy in the late 2000s and early 2010s. If you want to learn more, I recommend checking out An Explanation of the Financial Crisis of 2008.
March 9th, 2020
worst day for US stocks since the Great Recession, triggered by the coronavirus outbreak and the oil price war. It was the greatest one-day decline since 2008. As you'll see in the next line, though, this record didn't last even a week.
March 16th, 2020
Concerns about the possible financial impact of the coronavirus epidemic persisted. Because of this, the US market dropped more drastically in a single day than it had during the meltdown a week before. It's possible that the financial markets' first reaction to the coronavirus may peak on this day.
Conclusion
In sum, the 1987 stock market meltdown known as "Black Monday" was a catastrophic event. Other stock market collapses, such as those in 1929, 2008, and 2020, may also be referred to by this word. After what happened on Black Monday, new rules were put in place to limit the damage from future stock market disasters. The "circuit breaker," which stops trading after a certain percentage loss is reached, is one of the most significant and much debated of these rules. How can you safeguard yourself against the inevitable downturn in the market? If you want to come up with a good investing strategy or trading plan, you should consider the worst-case possibilities. Avoiding catastrophic losses during market collapses may be possible with the use of risk management, portfolio diversification, and market psychology.
FAQs
How much did the stock market crash on Black Monday?
On "Black Monday" (October 19, 1987), the Dow Jones Industrial Average fell 22.6%, marking the beginning of the modern global financial crisis.
Why did the stock market crash on Black Friday?
The 24th of September, 1869, is remembered as "Black Friday" in United States history because of the panic that ensued on the securities market as a consequence of the precipitous drop in gold prices. Attempts by financier Jay Gould and railroad mogul James Fisk to dominate the gold market and artificially inflate prices led to the catastrophe.
How did Black Thursday lead to the stock market crash?
The buying frenzy known as "Black Thursday" started on October 24th, 1929. A large number of shares of stock had been bought with "margin," or with loans covering just a portion of the shares' value. As a consequence, several investors were compelled to sell their shares as prices fell, which further exacerbated the market's downward trend.
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
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