Weekend Economists Reminisce: Black Monday October 19, 1987-2012

[Demeter]

9. The Motley Fool Revisited Black Monday Ten Years After

http://www.fool.com/Features/1997/sp971017CrashAnniversary1987Timeline.htm

Many people remember the events leading up to October 19, 1987. Unfortunately, very few of them recall the specifics. When many people talk about the dramatic drop in the overall stock market, they either blame a single cause (portfolio insurance) or treat the market fall as if it were something that came from out of the blue. Far from being a lightning strike or an act of God, the crash was a single event caused by a complex series of interconnected events. Hopefully after perusing the timeline we have constructed to review the events leading up to the crash, you will come to the same conclusion.

January 1, 1987

The year opens with bond yields near their lowest levels in nine years. Corporate treasurers have been issuing debt like it is going out of style, coining more than $200 billion in notes during all of 1986 -- two times the level of debt issued in 1985. A healthy market for junk bonds -- bonds issued that are considered below "investment grade" -- has helped tremendously. "With bond rates expected to remain at low levels, investment bankers predict that corporations will continue to flock." (New York Times, Jan. 2, 1987)

January 8, 1987

The Dow Jones Industrial Average closes at 2,002.25, breaking the 2,000 level for the first time. Trading volume swells to 194.5 million shares and most other stock indices set records as well. Optimism abounds that the string of records will bolster investor confidence and bring new investors into the market.

January 22-23, 1987

The Dow Jones Industrial Average leaps 51.60 points to 2145.67 on January 22, making its largest one-day point rise ever. Although well below any record for a percentage gain, the news is taken as another indicator that demand for stocks remains strong. The euphoria is slightly eroded the next day when the Dow plunges 114 points in 71 minutes on January 23. Program trading based on the difference between the value of stock futures and the cash market is blamed for the swing. Treasury Secretary James Baker expresses concern about the "excess" volatility....

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