Stock Market Crash of 1987 Term Paper

Pages: 12 (4043 words)  ·  Bibliography Sources: ≈ 15  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

Stock Market Crash of 1987

It is not without reason that October 19, 1987 is known as Black Monday. The day saw the biggest one-day decline in recorded stock market history in the United States as well as the rest of the world. The Dow Jones Industrial Average plummeted 508 points on the day, losing 22.6% of its total value, which was twice as bad as the previous worst fall of October 29, 1926 -- the trigger for the Great Depression. Other stock markets around the world mirrored the fall in the U.S. And by the end of October stock markets in Australia had fallen 41.8%, by 22.5% in Canada, 45.8% in Hong Kong, and 26.4% in the United Kingdom. What makes the Stock Market Crash of 1987 even more unique is the fact that the sudden decline hit the world almost out of nowhere as no major news or events occurred prior to the crash. As a result, there is a certain degree of mystery associated with the crash and the economists still struggle to explain the reasons behind the decline. This paper takes an in-depth look at the stock market crash of 1987 by tracing its background, the events of the day in the financial markets and the effects of the crash on the U.S. And global economy. It also explains the causes and consequences of the crash as well as the policy responses to the event and its future implications.

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TOPIC: Term Paper on Stock Market Crash of 1987 Assignment

The Crash on October 19, 1987 was preceded by five years of a robust bull-run on the U.S. stock markets that started in the summer of 1982. The five-year period had seen the Dow Industrial Average rise from 776 points in August 1982 to a high of 2,722 points in August 1987. (Itskevich, Jennifer, 2002) Ronald Reagan, who was elected as the U.S. President in the 1980 elections, was a great proponent of laissez faire economy. His across the board tax cuts of the early 80's and reductions in social welfare spending seemed to have ushered in an era of rising corporate profits. The bull market that followed was further fueled by hostile takeovers, leveraged buyouts and a merger mania. The conventional market wisdom of the eighties was that companies could grow exponentially simply by constantly purchasing other companies. The enormous funds required for such corporate takeovers and buy-outs were raised by selling "junk bonds" to the public and through Initial Public Offerings (IPOs). The personal computer industry was perceived to be the wave of the future and people believed that investment in such high-tech, high growth companies guaranteed constantly rising profits. The euphoria of the investing public was typical of every market bubble in which everyone jumps on the bandwagon to make a quick profit while naively believing that the market would always go up. But there were warning signs on the horizon before the stock market peaked on August 29, 1987, largely ignored by those caught up in the euphoria: a weakening U.S. dollar, a rising trade deficit and inflation, lower retail sales, and the first short-term interest raise in three years by the Federal Reserve in August 1987. Hence even before the Black Monday, the stock market had started to retreat with the Dow Jones Average having slipped 476 points in less than two months from its peak of 2722 points on August 29, 1987 and it stood at 2246 at the weekend before October 19, 1987. ("1987 Stock Market Crash" 2004)

An in-depth Look at the Crash

Events of the Day

Since the Dow Jones Industrial Average had suffered a 108.35-point loss on the previous day (Friday, October 16th), some optimists may have been expecting a rebound in the market when it opened on Monday, October 19th, after the weekend. They were to be disappointed as the Stocks descended quickly and the Dow fell 200 points soon after the opening bell to trade at around 2,046. By 10 a.m., the index had crept back up above 2,100. The pattern of rebound and retreat continued for most of the day with the total loss for the day looking to be around 200 points. The real mayhem in the market started in the last hour and a quarter of the day's trading. At about 2:45 PM, a massive sell-off began that ripped off another 300 points from the Dow. The blue chip index closed 508 points (or 22.6%) down for the day, closing at 1,738.74 points. Other indices followed the southward journey with the S&P index losing more than 20% to close at 224.84 and the Nasdaq Composite diving by 46 points to close at 224.84. ("Crash of 1987" n.d.)

No sector escaped the pounding from the bears on Black Monday. Prominent Dow Jones blue chips such as IBM shed 31-3/4 to close at 103-1/3, and Eastman Kodak fell 27-1/4 to 62-7/8. The crash did not spare technology stocks either. For example, Nasdaq favorite, Apple Computer lost 11-3/4 to close at 36-1/2, while Intel dropped 10 to 42. (Ibid.)

Panicked investors were frustrated throughout the day by the sluggish response to their sell orders as many of them were not able to sell immediately due to lack of liquidity and the inability of the computers and brokers to handle the heavy volumes.

Effect on U.S. Economy:

The precipitous one-day drop in stock prices wiped out about $1 trillion off the value of U.S. stocks alone. Many individual investors were ruined and there were dark predictions in the wake of the crash about the triggering of a recession and the onset of another Great Depression ala 1930s. Surprisingly, the fall out from the crash on the U.S. economy was small. In fact, the crash was seen by some market players as a "marvelous buying opportunity" since the stock market started to recover. This was partly due to the shedding of the excess fat from overvalued stocks and partly due to the interest rates decline in the decade following the crash that made investment in the stock market an attractive option. The injection of ample liquidity in the economy through timely action by the Federal Reserve was perhaps crucial in preventing a serious recession in the economy. Years later, Alan Greenspan commenting on a similar (but much smaller) slump in the stock market remarked: ".... we look back at the 1987 crash as a salutary event in terms of its implications for macro-economy." Various reasons have been advanced by experts why recession and erosion in consumer confidence did not occur in 1987, in contrast to what happened in the aftermath of the 1926 collapse. According to some commentators, the public's participation in the boom preceding 1987 was too narrow as compared to the 1920s. The bull run of the 1980s was driven mainly by market professionals rather than retail investors. As a result, the market crash of 1987 was seen more as a "Wall Street affair" which did not affect the "real" U.S. economy.

As for the negative effects of the crash, according to Facts on File, "The worst economic losses occurred on Wall Street itself, where 15,000 jobs were lost in the financial industry." (Quoted by Itskevich, 2002) Other negative effects of the crash included a downturn in the U.S. insurance industry and a "Savings and Loan crisis" in the United States. The effect of the downturn was somewhat limited and was confined to specific areas such as New England and Texas as these regions were linked most closely to the Savings & Loans and Insurance industries. (Pascual, Marsha, 1998)

C. Effect on Global Economy:

As noted earlier, the stock market collapse of October 1987 was not confined to the United States and had extended to most of the stock markets worldwide. Its effect on the global economy, however, was limited. Reasons for the limited effect are varied as each individual country has its own peculiarities. Some of the reasons for the insulation of global economy from the ill effects of stock market slumps are common to the ones in the United States that were discussed above. Moreover, the U.S. economy is by far the biggest world economy and the health of most world economies, especially of those countries that are trading partners of the U.S., is heavily dependent on the health of the U.S. economy. Since the U.S. economy continued its robust growth in the aftermath of 1987, it prevented the global economy from falling as well.

The limited effect of the 1987 crash on the global economy was also due to other reasons. For example, the financial markets of the 1980s when compared to those of the 1920s, had a much greater capacity to absorb stock market crises and preventing them from spilling over to the real side of the economy due to the newly evolved derivatives markets -- instruments that were not available in the 1920s. By 1980s, a much larger proportion of individual investors had started to invest in stock markets through institutional investors such as mutual funds and other professional… [END OF PREVIEW] . . . READ MORE

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APA Style

Stock Market Crash of 1987.  (2005, June 3).  Retrieved December 6, 2021, from

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"Stock Market Crash of 1987."  3 June 2005.  Web.  6 December 2021. <>.

Chicago Style

"Stock Market Crash of 1987."  June 3, 2005.  Accessed December 6, 2021.