1987 Crash: 20th Anniversary of Black Monday

by: Barry Ritholtz

I have not been a believer in the parallels between the present market and the 1987 crash. The backdrops are too different, and the impact of portfolio insurance too significant to draw a good analogy (A Demon of Our Own Design does an excellent job explaining this).

However, today is the 20th anniversary of Black Monday and the '87 crash. The media are having an orgy of retrospectives:

Barron's (Black Monday)
WSJ (Looking Back, Persistence Is the Lesson; Exorcising Ghosts of Octobers Past)
New York Times (A Pause to Recall the 1987 Crash)
BusinessWeek (Lessons from the '87 Crash)
UK Guardian (The lessons of Black Monday).

I'm sure more are to follow.

Of all the reviews I have seen, the most interesting was this week's Barron's cover story. Andrew Bary managed to find the right context for explaining the relative size of the Black Monday, and what it meant to investors in terms of opportunity.

Here's the Ubiq-cerpt:™

"IT'S FITTING THAT AS THE 20TH anniversary of the ferocious 1987 stock-market crash approaches, most major U.S. equity averages are at or near record levels, and many markets in the developing world at boiling points. – The prevailing view on Wall Street is that the monumental drop on Oct. 19, 1987, when the Dow Jones Industrial Average plunged 508 points – 22.6% -- on then-record volume, won't be repeated. There's good reason for the widespread optimism. But, then again, Wall Street seemingly is always optimistic until something goes terribly wrong. Not that the bulls don't have some good arguments. The Dow's drop on Oct. 19, 1987, was unprecedented, and hasn't come close to being equaled since then.

The largest percentage decline in the current decade was 7.1% on Sept. 17, 2001, and the biggest drop in the past two years was 3.3% on Feb. 27, 2007. Even the historic 1929 crash, while deeper, broader and longer-lasting, didn't produce a one-day downdraft as vicious as 1987 did. The Great Crash included a 12.8% one-day loss on Oct. 28, 1929, followed by an 11.7% slide the following day and one of 9.9% on Nov. 6. So, the 22.6% drop 20 years ago was truly a statistical outlier.

In fact, to the extent that Wall Street looks back at that disastrous fall day in 1987, it's probably to scoff with amazement that investors were foolish enough to dump stocks on what turned out to be one of the great buying opportunities. By the end of that year, the Dow had regained 11 percentage points of its loss. And by Dec. 31, 1988, the DJIA was almost 25% higher than it was at the end of Black Monday.

Good stuff.

Dow: Key Events, 1987 to Present.


1. Alan Greenspan becomes Fed chief
2. Oct.19, 1987 crash
3. Iraq invades Kuwait
4. Yahoo! IPO
5. Dow hits 11,750.
6. Sept. 11, 2001 terrorist attacks
7. Second Gulf War.
8. Ben Bernanke succeeds Greenspan

Black Monday
Barron's October 15, 2007