October 19, 1987. It started as a typical, somewhat gloomy Monday in New York. By the time the closing bell rang, the Dow Jones Industrial Average had hemorrhaged 508 points. That was a 22.6% drop in a single session. To put that in perspective, imagine the market losing nearly 9,000 points in six and a half hours today. It was total, unadulterated carnage.
People were literally screaming on the floor of the New York Stock Exchange. You’ve probably seen the grainy footage of traders with their heads in their hands, looking like they’d just witnessed a plane crash. In a way, they had. The black monday 1987 crash remains the largest one-day percentage decline in stock market history, and honestly, we’re still dealing with the scars it left on how global finance actually functions.
What actually caused the black monday 1987 crash?
Everyone wants a single villain. It makes for a better story. But the truth is that the 1987 collapse was a "perfect storm" of high interest rates, a falling dollar, and—most importantly—the birth of automated trading.
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Before 1987, the bull market had been on a tear. The Dow had tripled in five years. Everyone was feeling rich, or at least like they were about to be. But by mid-October, the vibes shifted. Hard.
Inflation was creeping up. The U.S. trade deficit was widening. Then, a weird thing called "portfolio insurance" entered the chat. This was a strategy developed by Hayne Leland and Mark Rubinstein, designed to use computer programs to automatically sell stock index futures when prices started to fall. It was supposed to be a safety net. Instead, it became a noose.
The feedback loop from hell
When the market started dipping on that Monday morning, these "insurance" programs did exactly what they were programmed to do. They sold. But because everyone was using the same strategy, the selling triggered more selling.
Computers didn't care about "buying the dip" or looking at company fundamentals. They just saw a number hit a threshold and dumped shares. This created a cascading effect. As the price of futures dropped, it dragged the cash market down, which then triggered more automated selling. It was a digital death spiral that nobody knew how to stop because, frankly, the technology was moving faster than the humans in charge could think.
The infrastructure just broke. Seriously. The systems used to process trades couldn't handle the sheer volume of sell orders. Investors were flying blind. If you tried to call your broker, the line was busy. If you looked at the ticker tape, it was running nearly two hours behind the actual prices on the floor. Imagine trying to trade stocks when the price you're seeing is from 195 minutes ago. It was chaos.
Why it wasn't just another Great Depression
If you look at the charts, 1987 looks terrifying. It’s a vertical cliff. But strangely enough, it didn't lead to a decade of bread lines and 25% unemployment like 1929 did. Why?
Enter Alan Greenspan. He had only been the Chairman of the Federal Reserve for a few months when the black monday 1987 crash hit. He didn't hesitate. On Tuesday morning, the Fed issued a one-sentence statement: "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 print as much money as needed to keep the banks from folding. It worked. The "Greenspan Put" was born—the idea that the Fed would always step in to save the market if things got too hairy.
- The Fed flooded the banking system with reserves.
- Interest rates were lowered immediately.
- Major corporations started massive share buyback programs to signal confidence.
By the end of the year, the market had actually recovered a decent chunk of its losses. It’s one of the weirdest footnotes in financial history: the biggest crash ever didn't actually break the economy. It just gave it a really, really bad heart attack.
The "Circuit Breaker" legacy
If you've ever noticed the stock market suddenly stop trading for 15 minutes during a massive sell-off, you can thank 1987 for that. Before this crash, there were no "kill switches." The market just kept falling until it hit the floor.
After the dust settled, the Brady Commission (led by Nicholas Brady) looked at the wreckage and realized we needed a way to pause the panic. They implemented circuit breakers. Now, if the S&P 500 drops 7%, trading halts. If it drops 13%, it halts again. If it hits 20%, they pull the plug for the day.
It's a "timeout" for adults. It gives people a chance to breathe, check their data, and realize that the world isn't actually ending. We saw these kick in during the COVID-19 crash in March 2020. They aren't perfect, but they prevent the specific kind of algorithmic runaway train that fueled the black monday 1987 crash.
Misconceptions about the "Yuppie" era
Pop culture likes to paint the 1980s as this time of endless cocaine and Gordon Gekko speeches. While that existed, the crash actually humbled a lot of people. It ended the "merger mania" of the mid-80s for a while.
A lot of people think the crash was caused by a specific news event, like a war or a president getting shot. It wasn't. It was a systemic failure. It proved that the "plumbing" of Wall Street—the way trades are settled and communicated—is just as important as the companies being traded. When the plumbing clogs, the whole house floods.
How to protect yourself from the next 1987
Look, another crash will happen. Maybe not tomorrow, maybe not next year, but it's baked into the nature of capitalism. The black monday 1987 crash taught us that liquidity is king. When things go south, everyone wants to sell at once, and if there are no buyers, the price is zero.
Diversification isn't just a buzzword
In 1987, if you were 100% in U.S. large-cap stocks, you were wiped out. If you had some bonds or cash, you were able to sleep (sorta). The biggest lesson is that "uncorrelated assets" are your best friend.
Don't trust the "Safety" of algorithms
The portfolio insurance of 1987 is today's high-frequency trading and AI-driven models. These systems are great until they aren't. When everyone is using the same math to make decisions, the market loses its diversity of opinion. And when everyone agrees the market should go down, it goes down fast.
Keep a cool head
The people who sold everything on October 20, 1987, regretted it. Within two years, the market was back to new all-time highs. The crash was a blip on a long-term chart, even if it felt like the apocalypse at the time.
If you want to survive the next big one, you need a plan before the panic starts. Check your asset allocation. Make sure you aren't over-leveraged. Most importantly, remember that the "impossible" happens about once a decade.
The black monday 1987 crash wasn't the end of the world, but it was a wake-up call that technology can sometimes outpace our ability to control it. We’re still living in the world that Monday created—a world of circuit breakers, central bank interventions, and the constant, nagging fear that the "big one" is just one algorithm glitch away.
To stay prepared, ensure your portfolio has at least 20% in assets that don't move in lockstep with the S&P 500, such as Treasury bonds or even specialized "tail-risk" hedges if you're managing a larger nut. Review your stop-loss orders; in a fast-moving crash, they might execute much lower than you expect due to "slippage." Finally, maintain a cash reserve of 6-12 months of expenses so you're never forced to sell during a 20% drawdown just to pay your rent.