Crypto and Market Crashes: Lessons from Black Monday

The financial markets have gone through numerous fluctuations, but few events have had as significant and widespread an impact on the global economy as Black Monday. This article explores the events and causes behind Black Monday.

1. What is Black Monday?

Black Monday refers to the event that occurred on Monday, October 19, 1987, when the U.S. stock market experienced an unexpected collapse. On that day, the Dow Jones dropped by 22.6%, and the S&P 500 lost 30%, marking one of the largest declines in global financial history. Imagine being a stock investor in 1987, waking up one morning to realize that your assets had lost more than 20% of their value in just a few hours. This was the harsh reality of Black Monday.

The collapse did not only shock the U.S. stock market but also spread globally. Economists believe that the event was the result of a combination of geopolitical tensions and the use of automated trading programs, leading to a rapid and uncontrollable sell-off.

2. How Did Black Monday Impact the Financial World?

On October 14, 1987, the news of the U.S. trade deficit surpassing expectations was released. This led to rising interest rates, a devaluing U.S. dollar, and a wave of strong sell-offs in the stock market. The escalating political tensions between the U.S. and Iran, coupled with rising oil and commodity prices, made the economic situation even bleaker as the markets closed on Friday, October 16, 1987.

Although the markets closed for the weekend, automated trading systems continued to function, prompting the selling of stocks. Investment funds allowed clients to withdraw funds at the prices settled on Friday, leading to withdrawals exceeding the available cash. As a result, when the New York Stock Exchange opened on October 19, 1987, these funds were forced to sell off large amounts of stocks.

The severe imbalance between buying and selling pushed the market into a collapse. A total of 604.33 million shares were traded on that day, three times the usual daily volume.

Futures and options markets also faced chaos as computer systems were overwhelmed by the large volume of trades, leading to serious market disruptions.

That day, the Dow Jones recorded a record drop of 508.32 points, or 22.61%. The S&P 500 also dropped by 30%, an unprecedented shock to the stock market.

Major companies such as General Electric, IBM, and Exxon fell victim to the chaos. GE's stock lost over 20%, while IBM and Exxon dropped nearly 20% and 18%, respectively. The collapse of these giants paralyzed the stock market. Investors rushed to withdraw funds from investment funds, creating an unstoppable wave of panic selling. On that day alone, Merrill Lynch's stock plummeted by nearly 30%, while Morgan Stanley struggled to meet client withdrawal demands.

What’s notable is that Black Monday didn’t just affect the U.S. but also caused a global ripple effect. From October 19 to 23, 1987, the FTSE 100 in London dropped by 25%, and the Nikkei in Tokyo fell by 13.2%. Other major exchanges like the Chicago Board Options Exchange and the Chicago Mercantile Exchange had to halt trading. This collapse even threatened the British government's share offering in British Petroleum.

3. The Aftermath of Black Monday

The aftermath of Black Monday was massive. Millions of investors witnessed their wealth evaporate in a single day. It is estimated that the total market capitalization of the New York Stock Exchange (NYSE) lost over $500 billion, a loss not seen since World War I.

4. Key Triggers of Black Monday

Before Black Monday, the U.S. stock market had experienced an incredible growth surge, tripling in value in just 4.5 years. In 1987 alone, the market rose by 44%. However, this increase raised concerns that stocks had risen far beyond the true value of the companies, creating a financial bubble.

Another contributing factor was the rise of automated trading systems. These systems were designed to automatically sell stocks when their prices fell below a certain level to protect investors from risk. However, during the crisis, these automated sell-offs triggered a domino effect, causing the market to spiral uncontrollably.

Additionally, the Federal Reserve's decision to raise interest rates to combat inflation made things worse. This increase in rates raised borrowing costs and reduced corporate profits, further fueling concerns about the economy's growth potential.

5. The Federal Reserve's Response After Black Monday

After the shock of Black Monday on October 19, 1987, the U.S. financial markets were in turmoil. Millions of investors watched their assets disappear in one day, and uncertainty about the financial future took over. In response to the crisis, the Federal Reserve took decisive action to stabilize the market.

The very next day, October 20, the Federal Reserve made a crucial announcement: it would provide liquidity to the financial system to ensure the markets didn’t freeze. To encourage lending and increase money circulation, the Fed lowered interest rates by 0.5% and pumped billions of dollars into the economy through quantitative easing policies.

These actions not only improved investor sentiment but also triggered a strong recovery in global markets. By mid-1988, the stock market had fully recovered, with the Dow Jones Industrial Average rising nearly 25% from the post-Black Monday lows.

Moreover, other financial regulators quickly implemented protective measures, especially the introduction of "circuit breakers" to halt trading when there were unusual market fluctuations. These measures helped maintain stability and prevent panic selling in the future.

6. Other "Black Mondays" in Financial History

Although Black Monday 1987 is the most famous event, the term "Black Monday" has also been used to refer to other significant market downturns that occurred on Mondays, such as:

• The First Black Monday (October 28, 1929): This event marked the beginning of the Great Depression, with the Dow Jones falling by 12.8%, followed by another 11.7% drop the next day.

• China’s Black Monday (August 24, 2015): On this day, China's stock market crashed, with the Shanghai Composite Index falling by nearly 9%. This occurred amid concerns about slow economic growth and ineffective government intervention.

• March 9, 2020: Although not officially termed "Black Monday," the Dow Jones dropped 7.79% on this day due to concerns over the COVID-19 pandemic. The stock market continued to decline in the following days, marking the beginning of the financial panic caused by the global health crisis.

Each of these "Black Mondays" had its own causes but shared common themes: investor panic, massive sell-offs, and the strong impact of macroeconomic factors on global financial markets. These events not only serve as historical milestones but also provide important lessons about market volatility and its potential consequences for investors.