It was 1987. Nobody was putting Baby in the corner. The rhythm was gonna get you. And stocks took the biggest single-day dive ever. On October 19, the Dow Jones industrial average (an index tracking 30 of the largest U.S. stocks) slid 508 points to 1,783 for a historic 22.6 percent loss. So you can imagine the panic investors endured at the time—enough to earn the name “Black Monday.”
What triggered the crash?
Even in hindsight, it’s hard to pinpoint. A few proposed reasons include: a five-year bull run growing weary, stock prices looking too expensive, the economy slowing, inflation rising and investors getting pretty cocky.
Plus, institutional investors were using “portfolio insurance,” a computerized trading order that was meant to protect them from steep losses by selling at specified prices. Unfortunately, the automatic selling exacerbated the problem and helped bring on a full-fledged panic on Wall Street.
What happened after?
Full recovery. In the two days following Black Monday, the Dow bounced back nearly 300 points. By the end of 1987, it was about 2 percent higher for the year. And since then, though there have been plenty of ups and down along the way, the Dow has marched up, through record high after record high, to as much as 26,600.
Could a crash like that happen again?
As witnessed in early February 2018, big drops can certainly occur, and volatility and corrections are natural for the market. But we’re not likely to see such a big one-day percentage drop again. (Knock on wood.)
After the 1987 crash, the New York Stock Exchange implemented “circuit breakers” to pause market activity should stocks ever freefall like that again. Now, if stocks were to slide 7 percent, trading would be suspended for 15 minutes; after a 20-percent decline, the exchange would shut down for the day. The idea is to give investors a breather and help alleviate panic.
What should I do next time the market crashes?
Try to avoid panic selling. The risk of cutting and running like so many fear-driven investors did on that fateful 1987 day is that even if you avoided some losses by selling early, you’d run the risk of missing out on the recovery because, well, how would you know when to jump back in? You could end up selling low and buying high to get back in—essentially the opposite of what you want to do.
The better option for long-term investors is typically to just ride it out. Black Monday—and the days that followed—serve as a reminder that even record one-day events don't necessarily set off big, bad chain reactions. And even when stocks have slipped into bear market territory (20 percent below recent highs), the market has recovered and continued to grow throughout history.
March 5, 2018