Black Monday

By: Julia Edwards

---

Throughout history, the stock market has experienced many highs and lows. However, one particularly significant day came in October 1987, when the market took a massive drop, a day now known as Black Monday. Black Monday was the first major modern financial crash and quickly dominated newspaper headlines around the world.

The Dow Jones Industrial Average (DJIA), a market index composed of 30 blue-chip companies trading on the New York Stock Exchange (NYSE) and the Nasdaq, lost 22% of its value in a single day. Meanwhile, the S&P 500, which tracks 500 of the largest publicly traded companies in the U.S., fell by 33%. Despite these drops, both happening in such a short period, they were caused by a multitude of reasons.

Firstly, the market had been climbing for several years, the prices had tripled, and investors were confident, so they continued to invest. Unfortunately, it was a matter of time before a correction was made and the market crashed. Another reason for the sudden crash was how quickly the computer programs were trading stocks. At the time, computerized trading was only just becoming popular, and the crash showed how the integration of technology could increase market volatility. The computers started rapidly buying stocks when prices were going up, causing them to rise even more, but at the same time, the computers were selling the stock just as fast. This created a feedback loop, computers reacting to price changes made those price changes even more drastic. Leading up to the crash, on October 16, triple witching occurred where three types of financial contracts expired: Stock options, Stock index futures, Stock index options. This made the market extra chaotic and unstable right before the crash happened on Monday due to all the investors adjusting their positions through buying and selling. The last contributor to the crash that caused it to escalate was the mass panic, especially the panic caused by the media. After the crash, many actions were taken to recover from the effects and prevent something like this from happening again. The Federal Reserve (the U.S. central bank) lowered interest rates by half a percent. They also put billions of dollars into the financial system to keep the economy running smoothly. Additionally, new trading protections were introduced, like Circuit breakers to automatically shut down trading in the event of unusual price movements.

Ultimately, Black Monday changed how markets operate and reminded everyone that even in times of confidence, market stability is never guaranteed.