It started like any other morning in October. Traders in New York grabbed their coffee, checked the ticker, and probably complained about the humidity. By the time the closing bell rang on October 19, 1987, the world had changed. Basically, the Dow Jones Industrial Average had just face-planted, losing 508 points in a single session.
That was a 22.6% drop.
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To put that in perspective, imagine a fifth of your net worth vanishing between breakfast and dinner. This wasn't just a "bad day" at the office. It was the Black Monday 1987 stock market crash, and it remains the largest one-day percentage decline in Wall Street history.
People often confuse it with the 1929 crash that sparked the Great Depression. Honestly, though? They were totally different beasts. While 1929 was a slow-motion train wreck leading to years of bread lines, 1987 was a high-speed digital pileup that, surprisingly, didn't actually wreck the economy.
Why did the market just... break?
If you ask ten different economists what caused the crash, you'll get twelve different answers. It's kinda complicated. There wasn't one single "smoking gun." Instead, it was a "perfect storm" of high interest rates, a falling dollar, and some serious geopolitical jitters in the Persian Gulf.
But the real villain in most people's eyes? The computers.
Back in the mid-80s, "program trading" was the hot new thing. Large institutional investors started using automated systems to execute trades. One specific strategy, called portfolio insurance, was designed to protect big players by automatically selling stock index futures if prices started to slide.
It sounded brilliant on paper. In practice? It was a disaster.
Once the selling started on that Monday, these computer programs all "woke up" at once and started dumping shares. This pushed prices lower, which triggered more automated sell orders. It was a feedback loop from hell. The humans on the floor of the New York Stock Exchange (NYSE) couldn't keep up. Printers jammed. Phone lines went dead. One trader reportedly said it felt like being in a building that was collapsing while you were still trying to file the paperwork.
The chaos nobody talks about
We often look at the charts and see a sharp V-shape, but the "boots on the ground" reality was way more visceral.
The panic didn't actually start in New York. It began in Hong Kong. Then it rolled through Europe like a contagion. By the time the U.S. markets opened at 9:30 AM, there was already a massive pile-up of sell orders.
A quick look at the carnage:
- Hong Kong: The market dropped so fast they actually shut the whole thing down for the rest of the week.
- London: The FTSE 100 plunged, made worse by a massive hurricane—the "Great Storm of 1987"—that had literally kept many traders away from their desks the previous Friday.
- Australia: Their market shed about 40% of its value by the end of the month.
In the U.S., the volume was so high—over 604 million shares—that the systems lagged by over an hour. You'd see a price on the screen, try to sell, and find out the "real" price was already 20 points lower. It was like trying to catch a falling knife in a dark room.
What most people get wrong about 1987
A huge misconception is that Black Monday caused a recession. It didn't.
Actually, the U.S. economy kept humming along. GDP grew in 1988. Unlike the 1929 crash, the banking system didn't collapse into a pile of dust. Why? Because the Federal Reserve, led by a very new Chairman named Alan Greenspan, stepped in immediately.
Greenspan issued a one-sentence statement the next morning: "The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system."
Basically, he told the world the Fed would keep the cash flowing. It worked.
Another weird fact: Despite the 22% drop on Monday, the market actually finished 1987 up for the year. If you had gone on a long camping trip in January and didn't check your mail until December, you would have thought it was a pretty okay year for your portfolio.
The birth of the "Circuit Breaker"
Wall Street realized they couldn't let the computers run the asylum anymore. In the wake of the Black Monday 1987 stock market crash, the SEC and the exchanges implemented "circuit breakers."
These are mandatory pauses in trading. If the S&P 500 drops 7%, everyone has to stop and take a breath for 15 minutes. If it hits 20%, they pack it up and go home for the day. The idea is to stop the "automated panic" that nearly destroyed the system in '87.
Lessons for your money today
So, what can we actually do with this history?
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First, liquidity is king. The reason 1987 didn't turn into 1929 was that the Fed provided liquidity to the banks so they wouldn't stop lending to brokers. For you, that means having an emergency fund so you aren't forced to sell your stocks when the market is "on sale" during a crash.
Second, don't trust "insurance" that relies on everyone else being rational. Portfolio insurance failed because it assumed there would always be a buyer on the other side. In a crash, buyers disappear. If your "safety strategy" requires the market to stay orderly, it's not a safety strategy—it's a gamble.
Actionable Next Steps:
- Review your "stop-loss" orders: Understand that in a fast-moving crash, a stop-loss might execute much lower than your target price due to "gapping."
- Check your diversification: The 1987 crash was global. Holding international stocks didn't help much that day, but holding bonds did. High-quality government bonds usually go up when stocks go down.
- Keep a "Crash Playbook": Write down now what you will do if the market drops 20% tomorrow. (Hint: Usually, the best move is to do absolutely nothing).
The 1987 crash taught us that the market is a fragile, interconnected machine. It can break in an instant, but as long as the underlying economy is healthy, it usually finds its way back. Just don't let the screens scare you out of your long-term plan.