Term Paper: Black Tuesday) Stock Market Crash

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[. . .] In hindsight, the crash was eventually blamed on index derivatives and dynamic trading strategies.

The severity of the crash took the world by surprise. The odds of such a catastrophic event can only be compared to an earthquake off of the Richter scale. Miraculously, the aftermath was relatively controlled. Surprisingly, not one stock clearing houses collapsed in the light of the catastrophic event.

Details of the crash

Is it important to review the causes of the crash? Like a Monday morning quarterback, seventeen years have understanding the 1987 market crash the basis for a better understanding of how the market will work in this new high-tech global economy. Black Tuesday is the most significant financial event of the 20th century and can be compared to the Great Depression in scope and sensationalism.

Several first help Black Tuesday gain so much recognition. First, the fact that the market fell as fast and as furious as it did was unprecedented. Also in the realm of firsts was how the market only took one day to have such as complete fall. Throughout history, analysts usually received some fair warning of a future collapse but this particular day baffled even the most seasoned investors and market watchers.

Most unbelievably, even with all of the latest technology and an accurate account of all the days prior and the actual day's event, there really has never been a viable solution to what actually happened. In other words, no one really knows for sure what happened on October 19th.

Market Recovery

Investors should be prepared for sell-offs. Sell-offs like the market crash of 1987 occurs for many reasons. There is no sure way to tell or predict what the market's recovery period will be based on the type of sell off. Some sell-offs have included speculative bubbles, a lack of confidence in the economy, a potential recession, increased inflation, war, or simply "just because." There are formulas that can show what happened but the fact is that recovery is variable.

How quickly do markets recover from devastating days like that of Black Tuesday? Historically, United States stock market sell-offs have shown that investors are working on the assumption that a market will regain a certain former price level. That is not guaranteed.

The other note to mention is that unfortunately bubbles seem to be occurring on a more frequent level as history is an excellent barometer of things to come. "While large asset price fluctuations are by no means a new phenomenon, a distinctive feature of the last two decades is that prolonged build-ups and sharp collapses in asset markets have taken place amidst a decline in consumer price inflation and a more stable macroeconomic environment in most of the industrialized world." (Unknown, "Asset Prices and the Business Cycle") Technically, could we consider the fallout of the Enron debacle a bubble?

Experts have confirmed that immediately after the Crash of 1987, it only took a few days for a few stocks to recover to original levels prior to the crash. The important observation was that the overall market took months to recover to the original pre-crash level prices. Although months sounds bad, there have been some worst case scenarios for stocks waited years to move back to a pre-crash level.

As the baby boomer generation prepares for retirement, investors should re-read the historical ledgers and investors should avoid get rich quick notions and move into the market for the long haul. Recovery and profits can be associated to patient investing over time which creates a situation of reduced market volatility.

(Black Tuesday)

Future Trends

What were future repercussions of Black Tuesday on investors? Only three-year later a new speculative bubble became apparent. Around 1990, a new era of computer firms promising the world started the dot.com era.

The dot.com era is another example of stock price growth that so far exceeds corporate earnings that the corporate earning's growth could never support the necessary revenues to meet investor expectations.

A good example of the missed investor realty can be demonstrated by a comparison of the Yahoo stock from the 1990's and ten years later. "Yahoo jumped $19.44 to $124.94 by the close of regular trading a day after the company reported stronger-than-expected earnings. Other Net stocks are riding Yahoo's wave: Amazon.com was up 6% at $35.06, Priceline.com jumped 10% to $35.62, and Lycos gained 6% to $44.25. America Online rose 3% to $57.44. The run-up comes after yesterday's sell-off, sparked by anticipation of Yahoo's earnings report. Yahoo's stock yesterday hit its calendar year low."(Jim Hu and Evan Hansen, Better-than-expected earnings boost Yahoo shares)

Today Yahoo's common sells for under $40 a share and no one today would even venture how the stock reached over a $100 only a decade ago. Like 1987, the dot.com era showed that a frenzied speculative bubble showed how irrational investors can be and will continue to be in the future.

There are many new concerns and current events for investors to consider. The September 11th attack on the United States by terrorists has completing the toppling of an already troubled airline industry. New terroristic threats on the United States have the travel and leisure tourism industries begging for new travelers. The North American Free Trade Agreement (NAFTA) between the North American nations seems to have given the United States' economy a much needed boost but then again the baby boomers are nearing retirement age and unsolved social security and healthcare issues abound.

The internet continues to make our world a smaller and more open economic arena. But that same entrepreneurial nation mentality has emerging nations increasing the demand for oil and other limited resources.

The price of oil has hit record prices per barrel and new highs are expected as the fragile supply chain centered by the OPEC nations is being pushed to its capacity limits because of an unsure future. The war with Iraq, Russia's tax issues and rouge sovereign entities in many oil producing African nations also interfere with oil supplies. Wow, the stock market will continue to be an unsure thing because the issues surrounding our future make investing an iffy proposition at best.

Stock volatility remains unusually low since the 1987 stock market crash. Since 1987, there have been very large increases in overall stock prices. What does that mean? Stock prices have been extremely volatile by historical standards.

Lessons Learned

Alan Greenspan became the Federal Reserve Bank Chief only a few months before the crash of 1987. There were many lessons learned for Mr. Greenspan. His responsibilities are to lead the Federal Reserve, which comprises the Board of Governors in Washington D.C., and twelve regional Federal Reserve Banks, to stop occurrences like the Stock Market "Crash of 1987 from ever happening again. He does this by:

Controlling the nation's monetary policies through influence over the fiscal and credit conditions of the economy

Regulate the banking institutions

Stabilize the financial system

Provide certain financial services to the U.S. government and other financial institutions

The one who seems to have learned the most from the events of the Black Tuesday Crash is the Federal Chairman himself. What he may have learned was that being in the market for the long haul is a better way to go then any get rich quick schemes. The impatient investor should take the lesson learned and move the quick payback thoughts to the back burner.

Therefore, have we seen the last of the big economic booms? There is a definite correlation of the economy in the late 1980's and today. Is there a better indicator of the current United States economic situation than the housing situation caused from constant interest controls by the Federal Reserve Bank and Alan Greenspan?

Similar to the aftermath of the world wide stock market crash in October of 1987, Alan Greenspan and the Federal Reserve Bank used interest rate controls to reinvigorate the United States economy. By lowering rates and creating a massive real estate boom, the economy was allowed to resurge and create new revenue streams for the banks and business sectors which held up the economy. Even with the seriousness of the stock market crash of October 1987, the renewed economic growth created by the new housing boom white washed Black Tuesday out of headlines.

Alan Greenspan and the Fed have used that same formula to beat inflation and to help protect the economy from the serious crash that seems to be looming. But like any medicine, the economy seems to be building some immunity to the cure all interest rate adjustments. In other words, like the crash of 87, something is looming and the same cure has been working but the dosage of medicine keeps going up. Similar to 1987, the United States housing boom is going on strong but there has not been a stock market crash as of yet. Greenspan and the Fed seem to have come up with a formula… [END OF PREVIEW]

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Black Tuesday) Stock Market Crash.  (2004, October 5).  Retrieved June 19, 2019, from https://www.essaytown.com/subjects/paper/black-tuesday-stock-market-crash/9746925

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"Black Tuesday) Stock Market Crash."  Essaytown.com.  October 5, 2004.  Accessed June 19, 2019.
https://www.essaytown.com/subjects/paper/black-tuesday-stock-market-crash/9746925.