Concerns are growing as the stock market continues to fluctuate, with investors uncertain following President Donald Trump’s sweeping tariff announcement last week.The uncertainty of a potential trade war led to sharp declines late last week and an extremely volatile trading day on Monday. As a result, Google searches spiked around the stock market crash of 1987, also known as Black Monday. That event refers to the sharp decline the markets saw on Oct. 19.Below is what you need to know about Black Monday 1987.Both the Dow Jones Industrial Average and the S&P 500 saw their largest single-day drops that day. The DJIA decreased by 22.6% and the S&P 500 by 20.5%.The crash marked the end of a bull market that had lasted since August 1982. A bull market refers to stock prices rising 20% or more from a previous low over a sustained period. Generally, bull markets occur during a growing or strong economy, a stable gross domestic product, soaring corporate profits and low unemployment rates.On Black Monday, the stock market opened with an imbalance of demand. More stocks were being sold than bought. The market ended up trading 604.33 million shares, three times the daily average. According to the Federal Reserve, the New York Stock Exchange lost more than $500 billion in market capitalization, the largest loss since the beginning of World War I in 1914.There isn’t one particular reason that caused the market to crash that day. It was a combination of various factors like rising global interest rates, a U.S. trade deficit, a declining dollar, inflation concerns and more that led to the collapse of the market.The Federal Reserve stated margin calls, program trading and difficulty obtaining reliable information added to the severity of the market collapse.What is a Margin Call?When investors enter contracts in futures markets, they’re required to post a portion of the contract’s value into an account with a broker. This value is referred to as a margin.If the value of a contract decreases, a broker can request the investor to add additional funds to their margin account. Margin calls are issued when the balance in the account dips below the maintenance requirement.The sharp price movement in futures contracts resulted in end-of-day margin calls becoming 10 times the average size on Black Monday. Investors had to meet these calls by the morning of Oct. 20. Many institutions didn’t have the cash to fulfill the requirement and relied on banks for loans.Banks became concerned about margin calls exceeding lending limits but still fulfilled them by extending credit. By doing so, banks prevented trading from becoming severely disrupted.What is Program Trading?Program trading refers to computers being set up to quickly trade large numbers of stocks when a particular stock index contains certain conditions. In 1987, there were two program trades: portfolio insurance and index arbitrage.Portfolio insurance is guaranteed to limit the losses investors might face in a declining market. Under this program, computer models were designed to calculate optimal stock-to-cash ratios at various market prices. Many portfolio insurers conduct their transactions in the futures market and trade in batches.The Brady Report showed that roughly 40% of non-market-maker sales in the futures market were conducted by portfolio insurers.So when the market began to crash on Black Monday, portfolio insurance algorithms triggered more stock sales, creating a cycle. Difficulty Obtaining Reliable InformationThe uncertainty and difficulty in accessing accurate information contributed to the crash. Rumors of the market closing added to investor panic, prompting more to sell and close their accounts.
Concerns are growing as the stock market continues to fluctuate, with investors uncertain following President Donald Trump’s sweeping tariff announcement last week.
The uncertainty of a potential trade war led to sharp declines late last week and an extremely volatile trading day on Monday.
As a result, Google searches spiked around the stock market crash of 1987, also known as Black Monday. That event refers to the sharp decline the markets saw on Oct. 19.
Below is what you need to know about Black Monday 1987.
Both the Dow Jones Industrial Average and the S&P 500 saw their largest single-day drops that day. The DJIA decreased by 22.6% and the S&P 500 by 20.5%.
The crash marked the end of a bull market that had lasted since August 1982. A bull market refers to stock prices rising 20% or more from a previous low over a sustained period.
Generally, bull markets occur during a growing or strong economy, a stable gross domestic product, soaring corporate profits and low unemployment rates.
On Black Monday, the stock market opened with an imbalance of demand. More stocks were being sold than bought. The market ended up trading 604.33 million shares, three times the daily average. According to the Federal Reserve, the New York Stock Exchange lost more than $500 billion in market capitalization, the largest loss since the beginning of World War I in 1914.
There isn’t one particular reason that caused the market to crash that day. It was a combination of various factors like rising global interest rates, a U.S. trade deficit, a declining dollar, inflation concerns and more that led to the collapse of the market.
The Federal Reserve stated margin calls, program trading and difficulty obtaining reliable information added to the severity of the market collapse.
What is a Margin Call?
When investors enter contracts in futures markets, they’re required to post a portion of the contract’s value into an account with a broker. This value is referred to as a margin.
If the value of a contract decreases, a broker can request the investor to add additional funds to their margin account. Margin calls are issued when the balance in the account dips below the maintenance requirement.
The sharp price movement in futures contracts resulted in end-of-day margin calls becoming 10 times the average size on Black Monday. Investors had to meet these calls by the morning of Oct. 20. Many institutions didn’t have the cash to fulfill the requirement and relied on banks for loans.
Banks became concerned about margin calls exceeding lending limits but still fulfilled them by extending credit. By doing so, banks prevented trading from becoming severely disrupted.
What is Program Trading?
Program trading refers to computers being set up to quickly trade large numbers of stocks when a particular stock index contains certain conditions. In 1987, there were two program trades: portfolio insurance and index arbitrage.
Portfolio insurance is guaranteed to limit the losses investors might face in a declining market. Under this program, computer models were designed to calculate optimal stock-to-cash ratios at various market prices. Many portfolio insurers conduct their transactions in the futures market and trade in batches.
The Brady Report showed that roughly 40% of non-market-maker sales in the futures market were conducted by portfolio insurers.
So when the market began to crash on Black Monday, portfolio insurance algorithms triggered more stock sales, creating a cycle.
Difficulty Obtaining Reliable Information
The uncertainty and difficulty in accessing accurate information contributed to the crash. Rumors of the market closing added to investor panic, prompting more to sell and close their accounts.
