A stock market crash can unfold as a chain reaction of market distress that sends exchanges around the world plummeting in a matter of hours, and the ceiling for how bad a single day can get was set on October 19, 1987. On that day the Dow Jones Industrial Average dropped 22.6 percent in one trading session, a loss that remains the largest one-day stock market decline in history. [1] The session took 508 points off the Dow and closed it at 1,738.74. [2] When the next headline uses the word crash, the practical step is to read it against the record. The numbers that matter are the index involved, the drop below its previous close, and the pace of the fall, because the two crashes examined here, 1987 and 1929, produced opposite aftermaths from what their one-day percentages alone would suggest.
The record day of October 19, 1987
That session was, at the time, the sharpest market downturn in the United States since the Great Depression. [1] It was named Black Monday almost immediately. [2] The day also demonstrated the extent to which financial markets worldwide had become intertwined and technologically interconnected. [1] Thirty-nine years later, it remains the session that crash headlines get measured against.
Why the worst day fell so fast
The record session had a run-up, and its speed came from mechanics. Stock markets raced upward during the first half of 1987; by late August the Dow had gained 44 percent in a matter of seven months, stoking concerns of an asset bubble. [1] The Dow hit a then-record high of about 2,722 in late August, and by October the worries were rising interest rates and a weakening dollar. [2] In mid-October the federal government disclosed a larger-than-expected trade deficit, part of a stretch of news reports that undermined investor confidence. [1]
Prices slid through the week of October 12, and on Friday, October 16 the Dow fell 108 points, a big one-day drop at the time. [2] Selling began in Asia on Monday morning. Hong Kong fell so sharply that its exchange closed for the rest of the week, and by the time New York opened, sell orders had stacked up so heavily that many stocks could not start trading on time. [2]
The fastest part of the decline had a mechanism. Portfolio insurance was a strategy in which large investors' computer models sold stock index futures as prices fell, to limit losses; when everyone running the same playbook sold at once, the selling pushed prices lower, which triggered more selling. [2] Program trading fired off large baskets of orders automatically, and the New York Stock Exchange handled more than 600 million shares that day, a record at the time, overwhelming its systems and specialists. [2] A presidential task force led by Nicholas Brady, known as the Brady Commission, studied the crash and reported in early 1988, singling out portfolio insurance and the poor coordination between the stock market and the futures market as major factors. [2]
October 1929, the other benchmark
The older benchmark reads differently. On Black Monday, October 28, 1929, the Dow declined nearly 13 percent, and on the following day, Black Tuesday, the market dropped nearly 12 percent. [3] Both one-day moves sit below the 1987 record. The name Black Monday belongs to two days, October 28, 1929, and October 19, 1987; the day remembered as Black Tuesday is October 29, 1929. [3]
On that Tuesday Wall Street investors traded some 16 million shares on the New York Stock Exchange in a single day, and billions of dollars were lost, wiping out thousands of investors. [4] The boom before it was part of the setup. The Dow had increased six-fold from sixty-three in August 1921 to a closing peak of 381.17 on September 3, 1929. [3] In the weeks around that peak, the market had gone through wild speculation, production had already declined and unemployment had risen, leaving stocks in great excess of their real value. [4] After prices peaked, the economist Irving Fisher proclaimed that stock prices had reached "what looks like a permanently high plateau." [3] Among the causes later listed for the 1929 crash were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank loans that could not be liquidated. [4]
The slide after those two days dwarfs the two-day numbers. By mid-November 1929 the Dow had lost almost half of its value, and the decline continued through the summer of 1932, when the Dow closed at 41.22, its lowest value of the twentieth century, 89 percent below its peak. [3] What made 1929 historic was the slide that followed, more than the size of any single day.
The circuit breakers 1987 set off
The record session changed market structure. Black Monday led to a number of noteworthy reforms, including exchanges developing provisions to pause trading temporarily in the event of rapid market sell-offs; those pause provisions are the market's circuit breakers, rules built after 1987 and updated since. [1] The Federal Reserve's response set a precedent for the central bank's use of liquidity to stem financial crises. [1] For a headline reader, the practical question these rules answer is whether trading paused.
Same word, different aftermaths
Aftermath is where the two records part ways. After 1987's record-setting fall, the American economy did not fall into a recession, and the Dow finished 1987 a little higher than it started the year. [2] After 1929's smaller single-day drops, the slide kept going, and the Dow did not return to its pre-crash heights until November 1954, roughly twenty-five years after the crash. [3]
One common telling connects that slide to the crash directly. In the aftermath of Black Tuesday, America and the rest of the industrialized world spiraled downward into the Great Depression, in the words of the standard history of the event. [4] The Federal Reserve's own history of 1929 draws a more careful line, recording that Federal Reserve leaders differed on how to respond to the event and support the financial system. [3] The two framings agree on the depth of the slide and differ on how directly the crash produced what followed.
The next crash headline can be read against these records. Name the index and the market. Take the percentage from the previous close. Look at the pace, one session or several. Check whether trading paused. Quotes on findailys arrive with a delay, so a live-looking number is a delayed reading. The percentage sizes the day against the record, and the aftermath depends on what comes after the selling, including how policymakers respond.