#110 Investment Compass -Ep.08- Black Monday 1987

The Historic Stock Market Crash and Its Lessons

Jun 15, 2025

Introduction: A Day of Unprecedented Panic

On October 19, 1987, stock markets around the world plunged in a dizzying freefall that would forever be known as Black Monday. In the United States, the Dow Jones Industrial Average (DJIA) collapsed by 508 points – a stunning 22.6% loss in a single trading session, marking the largest one-day percentage drop in Wall Street history. This first truly global financial crisis sent shockwaves across continents within hours, wiping out an estimated $1.7 trillion in market value worldwide. Investors and policymakers feared that the severity of the crash might trigger extended economic chaos or even a repeat of the Great Depression. Fortunately, a depression did not materialize, but Black Monday remains one of the most notorious days in financial history, and its story offers invaluable insights into market dynamics and investor psychology.

In this article, we’ll break down what happened on Black Monday 1987, including the causes of the crash, the timeline of events, and how markets and leaders reacted. We’ll also examine the impact on U.S. and global markets, the regulatory and structural changes that followed, and key lessons learned. Finally, we’ll put Black Monday in context by comparing it to other major market crashes (such as 2008 and the 2020 COVID-19 crash) to see what makes 1987 unique and what parallels exist. The goal is an informative yet accessible exploration, in a professional-casual tone, suitable for both novice and experienced investors. So let’s rewind to the mid-1980s and set the stage for the drama of Black Monday.

Background: The Roaring ’80s and a Brewing Bubble

The mid-1980s were a time of roaring markets and growing optimism. From 1982 to 1987, stocks experienced an extraordinary bull run. The Dow Jones index had climbed from about 776 in August 1982 to a peak of 2,722 by late August 1987 – roughly a tripling in five years. In the first eight months of 1987 alone, the Dow surged 44%, an unsustainable rise that led many to suspect an asset bubble was forming. This euphoria was not confined to the United States; stock indices across many major countries saw similar gains during that period, reflecting a worldwide boom in equities.

By the fall of 1987, however, storm clouds were gathering over the markets. Investors were growing uneasy that stock prices had outpaced economic fundamentals. In mid-October, a series of events eroded confidence. The U.S. government reported a much larger-than-expected trade deficit, which put downward pressure on the U.S. dollar’s value. At the same time, there were worries about rising interest rates and persistent budget deficits in the United States – factors that could threaten corporate profits and stock valuations. These concerns made the markets jittery and introduced a sense that something had to give.

The week before Black Monday saw increasing volatility and declines. On Wednesday, October 14, the Dow fell 3.8%, followed by another sharp drop on Thursday. On Friday, October 16, a confluence of technical factors known as “triple witching” – the simultaneous expiration of stock options, index options, and index futures – led to heavy trading and more selling pressure. By the end of that Friday, the Dow was down 4.6% for the day. This string of losses was significant – in fact, the market had slid over 10% in the three trading sessions leading into Black Monday, an unusually steep prelude that in itself contributed to investor anxiety.

To make matters worse, over the weekend U.S. Treasury Secretary James Baker hinted at a potential rift in international economic policy. He publicly threatened on Saturday (Oct 17) that the U.S. might allow the dollar to devalue if West Germany did not ease its interest rates – essentially foreshadowing a possible currency war. This remark rattled global investors. Under normal conditions, a weaker dollar would hurt foreign demand for U.S. stocks, and Baker’s aggressive stance further undermined confidence. All these ingredients set the stage for a fraught Monday. Many market participants went into October 19, 1987, on edge, uncertain but suspecting that the “party” might be over (as one magazine ominously put it).

Black Monday: The Crash Unfolds

Monday, October 19, 1987, began with an atmosphere of dread – and it did not disappoint. Thanks to time zone differences, the carnage started in the markets of Asia-Pacific before the New York Stock Exchange even opened. As trading kicked off in Tokyo, Hong Kong, Sydney, and other centers, sell orders flooded in and prices plunged. Investors around the world were scrambling to liquidate positions. Notably, New Zealand’s stock market ultimately plummeted about 60% from its pre-crash peak (the deepest decline of any market), and Hong Kong’s Hang Seng Index would end up dropping nearly 46%, the worst percentage decline among major exchanges. The selling wave rolled westward into Europe later that morning, hammering markets in London, Frankfurt, and beyond. By the time the U.S. markets prepared to open, a chain reaction of market distress had gone global.

When the opening bell rang on Wall Street at 9:30am Eastern Time, chaos ensued. A massive backlog of sell orders from panicky investors overwhelmed the system. There were far more sellers than buyers at any price, causing a liquidity vacuum – bids simply vanished as everyone rushed for the exits. The Dow Jones index nosedived immediately, and by day’s end it had lost 508 points, or 22.6% of its value. (For perspective, a 22% one-day drop on the current Dow would equate to thousands of points.) The broader S&P 500 Index fell similarly, about 20%. It was an unprecedented collapse – the largest one-day U.S. stock decline on record. News traveled fast on live television and radio, amplifying the sense of panic. Investors and traders, seeing the tape of plunging prices, felt a collective shock. As Intel CEO Andrew Grove described it, “There is so much psychological togetherness… It’s a little like a theater where someone yells ‘Fire!’”. In other words, fear became contagious and self-reinforcing.

During the mayhem, parts of the market’s infrastructure strained under the volume. The New York Stock Exchange experienced trade execution delays and some stocks couldn’t find buyers. On the Nasdaq market, many market maker firms (which normally facilitate trading) simply stopped answering their phones, exacerbating illiquidity – some Nasdaq stocks effectively stopped trading for hours. Investors were left watching helplessly as valuations evaporated. By the closing bell, Black Monday had earned its name, and virtually no corner of the market was left unscathed.

Why Did It Happen? Causes of the Crash

One of the most puzzling aspects of Black Monday is that there was no single obvious trigger – no huge negative news event on that day that explained a global meltdown. Instead, the crash appears to have been caused by a perfect storm of factors that had been building, combined with a heavy dose of investor panic. In the aftermath, regulators and economists identified several key contributors to the collapse, including structural issues in how markets functioned. Let’s break down the main causes:

Excessive Valuations and a Long Bull Run: Stocks had been rising dramatically for years leading up to 1987, a climb fueled by optimism and abundant liquidity. By some measures, shares were overvalued and overdue for a correction. From 1982 to 1987 the Dow tripled in value, and stock prices had far outpaced earnings growth, making a sharp pullback seemingly inevitable. In fact, an influential magazine cover story just before the crash was titled “Is the Party Over?”, reflecting widespread concern that the market had risen too far too fast. This general overvaluation meant the market was vulnerable to any loss of confidence.
Program Trading and Portfolio Insurance: A major new factor in the 1980s was the advent of computer-driven program trading strategies. Foremost among these was something called “portfolio insurance.” This strategy used computer models to automatically sell stock index futures in declining markets to hedge (protect) large portfolios. In theory it was supposed to limit institutional investors’ losses without them having to sell their actual stocks. In practice, on Black Monday it poured gasoline on the fire. As stocks started falling, the computers behind portfolio insurance programs kept issuing sell orders – which drove prices even lower, triggering more selling in a reinforcing feedback loop. Human decision-making was largely absent; instead, algorithms responding to price declines kept dumping equities. This “sell-at-any-price” automation greatly accelerated the crash once it began. One study noted that an initial price drop “starts a vicious circle” as portfolio insurers sell into weakness, causing further declines and further automated selling. Program trading in various forms (including index arbitrage between futures and stocks) accounted for a significant portion of the trading volume and was later blamed for intensifying the day’s volatility.
Macro-Economic and Policy Pressures: Apart from technical trading factors, broader economic worries set the backdrop. In 1987 the U.S. was running large trade and budget deficits, and interest rates had been rising. In September and early October, the U.S. dollar was under pressure internationally, and there was disagreement among global policymakers on how to handle it. The Louvre Accord signed in early 1987 was an attempt by major countries to stabilize currencies, but by the fall investors doubted its success. When West Germany’s central bank raised interest rates and U.S. officials (like James Baker) responded combatively about the dollar, it spooked investors worldwide. The prospect of a falling dollar and higher U.S. interest rates made foreign investors start pulling back from U.S. stocks. In short, by mid-October the market was on edge due to currency and rate tensions, deficit worries, and the sense that the era of easy gains might be ending. This climate of uncertainty meant that once selling began, there were few comforting fundamentals to fall back on.
Triple Witching and Derivatives Volatility: The crash was preceded by the triple witching Friday on October 16, when monthly expirations of futures and options led to a burst of last-minute trading and unusual price swings. That day saw heavy selling into the market close and possibly technical imbalances that carried over after the weekend. Some analysts believe this contributed to a fragile start on Monday. Moreover, when the futures market opened on Monday (before the stock market) and indicated a steep drop, it created a pricing disconnect – stock prices at the open were “stale” relative to futures, adding confusion. The tight linkage that normally keeps futures and stock prices in sync broke down, and price discovery failed: traders didn’t even know what a fair price was, which further hampered liquidity. This technical chaos in derivatives markets amplified the panic in the cash stock market.
Mass Psychology and Panic Selling: Above all, investor psychology turned decidedly negative and panicky. Once the slide started, fear fueled more fear. Investors were essentially acting in herd fashion, dumping stocks simply because they saw others doing the same. Media reports of the plunge fed a feeling of crisis. As one market participant recalled, “It felt really scary… People started to understand the interconnectedness of markets around the globe”. Selling beget more selling in a classic self-fulfilling prophecy, akin to a bank run mentality. In the absence of clear information, rumors and worst-case scenarios took hold. Many investors decided they’d rather sell first and ask questions later. This kind of run on the market is largely driven by emotion – a rapid shift from euphoria to anxiety to outright panic. In 1987, the emotional swing was extreme, causing traders to overshoot to the downside just as they had exuberantly pushed markets too high before. Once confidence evaporated, even fundamentally solid stocks were dumped en masse. It’s a stark reminder that markets are not always rational in the short term; psychology and sentiment can overwhelm facts in a crash.

In summary, Black Monday’s crash was a confluence of factors: an overextended bull market primed for correction, new automated trading mechanisms that exacerbated selling, real economic concerns (deficits, interest rates, currencies) undermining confidence, and an panic feedback loop. As one contemporaneous analysis noted, no single news story “caused” the crash, but several forces combined to create an atmosphere of panic. When those forces hit an over-leveraged, fragile market, the result was an accelerating downward spiral. While debate continues on the exact weighting of each cause, most agree that portfolio insurance and program trading played a central role in accelerating the rout, and that the crash exposed flaws in market structure and regulation that would soon be addressed.

Market Reactions and the Aftermath

As Black Monday unfolded, immediate reactions were scarce – it was largely a day of shock and freefall. But in the aftermath, key players took action to stem the crisis. Perhaps the most crucial response came from the U.S. Federal Reserve. Early on Tuesday, October 20, before the markets reopened, Fed Chairman Alan Greenspan issued a now-famous statement: “The Federal Reserve… affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”. In plain terms, the Fed was saying, we will do what it takes to keep markets functioning. This announcement – Greenspan’s first big test as Fed Chair, having taken the role only a couple of months prior – was intended to reassure banks and investors that the central bank would provide liquidity (cash and credit) as needed to meet the flood of withdrawals and margin calls. Behind the scenes, the Fed actively encouraged major banks to keep lending to brokerage firms to ensure they could meet their obligations. And indeed, the largest banks in New York dramatically increased loans to securities firms, nearly doubling their lending that week to backstop the brokerage industry. This coordinated effort helped prevent a seizure in the financial plumbing. Essentially, the Fed acted as lender of last resort, pumping confidence (and cash) into a terrified market.

The Fed also eased monetary policy to help calm the markets. In the days following the crash, the Federal Reserve cut the discount rate and short-term interest rates to make borrowing cheaper, which was a way to boost liquidity. (One account notes that the Fed cut rates by about half a percentage point in the immediate aftermath.) Additionally, the Fed engaged in open market operations – injecting funds into the banking system. These moves were early forms of intervention that today we might compare to quantitative easing, aimed at stabilizing the system. The central bank’s swift and forceful actions were widely credited with preventing the stock market turmoil from igniting a broader financial crisis or economic recession in the United States. In contrast to 1929, when authorities largely stood aside or tightened policy, in 1987 the Fed’s supportive stance helped break the fall.

Other institutions took steps as well. The New York Stock Exchange, for instance, mulled whether to halt trading on Black Monday but lacked clear rules to do so. Over the next days, exchange officials manually slowed trading in some stocks to restore order. Meanwhile, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) coordinated with exchanges to investigate what went wrong and how to prevent a repeat. Major banks like J.P. Morgan and brokerage firms also cooperated to support the functioning of the market, honor trades, and avoid a cascading failure of any big financial firm. It’s worth noting that despite the panic, no major Wall Street firm went bankrupt as a direct result of the crash – a crucial difference from 1929 or 2008. The system bent, but it did not break.

One remarkable aspect of Black Monday is how quickly the stock market found its footing again. After the record 22.6% plunge on Monday, the very next day (Tuesday, Oct 20) the Dow Jones initially fell further in early trading but then reversed course and closed with a small gain. By Wednesday, the market surged upward as bargain hunters (and perhaps those reassured by the Fed) jumped in. In just two trading days, the Dow regained about 57% of the losses, rebounding 288 points. Volatility remained high for a while, but the worst was over within that week. Confidence slowly returned. Impressively, by September 1989 – less than two years later – the Dow had fully recovered to its pre-crash high, erasing the Black Monday drop entirely. In fact, the Dow ended up slightly positive for the full calendar year 1987, despite the trauma of October. This rapid recovery was in stark contrast to 1929 (when stocks took 25 years to regain their highs) and even to more modern crashes like 2008 (when it took multiple years to bounce back). It underscored that Black Monday, while a violent shock, was more of a market panic than an economic event. There was no fundamental economic collapse underpinning it – U.S. GDP continued to grow in 1987 and 1988, and unemployment remained relatively low.

In the end, no recession followed in the United States, and the banking system stayed intact. Former Fed Vice Chairman Donald Kohn later observed that unlike previous crises, the 1987 crash “was not associated with a deposit run or any other problem in the banking sector”. In other words, it didn’t spread to everyday financial life – partly thanks to the Fed’s actions. Some have argued that the Fed’s intervention set a precedent (sometimes dubbed the “Fed put”) making investors believe the central bank would always ride to the rescue in future sell-offs. This raises moral hazard concerns – the idea that bailouts can encourage risky behavior – but at the time, stabilizing the situation was the top priority. The consensus is that the Fed’s bold response in 1987 was crucial to containing the damage.

For investors who didn’t panic-sell at the bottom, the lesson was reinforced that markets can and do recover. Many who sold on Black Monday locked in huge losses, whereas those who held their positions saw values climb back in the ensuing months. In fact, some savvy investors viewed the crash as a generational buying opportunity – shares of blue-chip companies were suddenly “on sale” at 20-30% discounts, even though nothing fundamentally had changed about those businesses. One famous example: a relatively unknown money manager at the time, Peter Lynch, calmly bought stocks during the rout for his Magellan Fund, helping it outperform. Likewise, Warren Buffett later noted that he was busy buying that day. The common thread: veteran investors understood that panic is not a strategy, and that crashes, though painful, are part of market cycles. This isn’t to minimize the fear everyone felt on that Monday – it was legitimately terrifying – but it highlights that keeping a long-term perspective is vital. As we’ll discuss in the lessons section, Black Monday taught (or reminded) investors that staying calm during a crash is often the wisest course.

Global Shockwaves: Impact on International Markets

Black Monday was not just an American event; it was a truly global market crash. In the days and weeks of late October 1987, virtually every major stock market around the world suffered a significant decline. The interconnectedness of financial markets, which we take for granted today, was starkly revealed as news and panic spread across time zones. As one contemporary put it, “for the first time, investors could watch on live television as a financial crisis spread market to market – much the same way viruses move” across populations. Here’s a snapshot of the global impact:

Worldwide Market Freefall: All 23 of the world’s largest industrialized markets experienced a sharp drop in October 1987. In 19 of those markets, stocks fell by over 20% from their pre-crash levels. In many countries, the worst of the decline was concentrated around October 19 (or October 20, depending on local time). The scope was unprecedented – this was not a single-market event but a synchronous meltdown. From London to Hong Kong to Toronto, investors saw billions erased in hours.
Worst Hit Markets: The magnitude of the crash varied. The Hong Kong stock market was the hardest hit, with an astonishing 45.8% plunge in late 1987. Hong Kong’s Hang Seng Index fell 11% on October 19 alone and continued to slide; the situation grew so dire that Hong Kong authorities closed the stock exchange for four days after Black Monday to stem the panic. Australia and Singapore also saw declines north of 40%. In the United Kingdom, trading was actually closed on Oct 16 due to a major storm, but when the London Stock Exchange reopened on Black Monday, it immediately fell ~14%, and by the next day it was down 23% in two days (very similar to the U.S. drop). Markets in Canada, France, and other developed nations all fell in the 20–30% range. Even markets that were less integrated globally, like some in Scandinavia, were pulled down. The least affected major market was Austria, which still fell about 11% – a dizzying drop by normal standards, but modest compared to others.
Japan’s “Blue Tuesday”: Japan’s stock market crash is an interesting outlier. Because of the time zone, Japan’s big drop happened on Tuesday, October 20 (dubbed “Blue Tuesday” there). The Tokyo market initially fell about 14.9% in one day – a huge drop, though smaller than New York’s. Notably, **Japan’s market recovered to pre-crash highs within only five months】. Several factors helped Japan bounce back: the Japanese financial system at the time had some built-in stabilizers. For example, there were daily price move limits on stocks (preventing any one stock from falling more than a certain percent), strict rules on short-selling, and even informal agreements where large institutions would step in to buy shares to prop up the market. In fact, on the day of the crash, Japanese officials famously invited big securities firms over for “tea” and urged them to buy – and they did. These measures calmed the market. Thus, Japan suffered a shock but no prolonged bear market from this event. (Ironically, Japan’s real crash would come a couple years later in the 1990s after its own asset bubble burst.)
New Zealand’s Lasting Pain: On the other end of the spectrum, New Zealand provides a cautionary tale. The New Zealand market had one of the steepest declines (around 60% from its 1987 highs), and more importantly, New Zealand’s economy slid into a severe recession afterward. Analysts often cite that the Reserve Bank of New Zealand (their central bank) chose not to loosen monetary policy or support liquidity in the same way that the Fed and others did. The result was a longer-lasting economic impact in New Zealand, including a significant downturn in real estate and businesses. This contrasted sharply with countries like the U.S., where proactive central bank moves helped limit broader damage. It illustrated how policy responses influenced outcomes: those who injected liquidity (U.S., Germany, Japan, etc.) saw relatively limited economic fallout, whereas those who did not (New Zealand) suffered more prolonged pain.
Global Fears and Coordination: In the immediate aftermath, there were genuine fears that the global financial system might seize up. Some worried about banks failing if markets continued to tumble. Fortunately, central banks worldwide, led by the Fed, moved to reassure markets. The Group of Seven (G7) nations coordinated to some degree, pledging to ensure liquidity and stable currencies. This international policy cooperation was critical in calming the currency markets and, by extension, stock markets. Black Monday’s global scope taught leaders that financial markets were now internationally intertwined – a relatively new concept in 1987, when globalization of finance was accelerating. It wasn’t possible for one country to ignore problems in another; a crash anywhere could become a crash everywhere. This realization led to greater communication among regulators and central bankers in different countries during crises.

In summary, the global impact of Black Monday cannot be overstated. Virtually overnight, it wiped out huge chunks of national market capitalizations – for example, about a third of the value of the UK stock market evaporated within weeks. While the U.S. gets a lot of the attention (since it was and is the largest market), many other countries were hit even harder in percentage terms. The event underscored that financial contagion is real: panic can hop borders with ease in a connected world. That lesson would be revisited in later crises, but 1987 was one of the first modern instances of a simultaneous worldwide crash.

Aftermath: Reforms and Structural Changes

Black Monday was a wake-up call for regulators and market participants. It exposed various structural flaws and gaps in the financial system. In the months and years after 1987, a series of reforms were implemented to reduce the likelihood of a similar meltdown and to blunt the impact if one were to occur. Here are some of the most significant regulatory and structural changes that followed the crash:

Introduction of Circuit Breakers (Trading Halts): Perhaps the most famous reform was the establishment of “circuit breakers” on stock exchanges. These are automatic trading halts triggered by large market declines, meant to pause trading and give investors a cooling-off period. The concept is that if the market is plunging rapidly (say beyond a certain percentage in minutes or hours), a timeout can prevent panic from accelerating and allow information to catch up. The Brady Commission, a task force led by Nicholas Brady to investigate the crash, recommended such measures. In 1988, the New York Stock Exchange (NYSE) and others implemented circuit breaker rules. For example, under rules adopted after 1987, if the S&P 500 index fell by, say, 7% in a short time, the exchange would halt trading for 15 minutes (a Level 1 halt). Larger drops (13%, 20%) would trigger longer halts or even end trading for the day. The idea is to prevent a freefall and stop the cascade of panic-selling. These mechanisms have been updated over time (as of 2022, U.S. markets halt at -7%, -13%, and -20% drops for specified durations). And indeed, in subsequent years – notably in the 2020 COVID market crash – these circuit breakers have been tripped and are credited with reducing chaos. Circuit breakers were a direct response to the fact that in 1987, exchanges had been “powerless to intervene” during the freefall. Now, they have a tool to hit the proverbial “pause” button in extreme situations.
Unified Clearing and Settlement: Another issue revealed in 1987 was a lack of coordination in trade settlement between different markets. Back then, stocks, futures, and options all had different settlement periods (the time to finalize trades and exchange cash). For instance, stock trades settled in T+5 or T+3 days, whereas futures settled next-day. This mismatch meant that after the crash, many traders faced a liquidity crunch: they had to pay up on losing futures bets before they received cash from selling stocks, which exacerbated pressures and could force fire-sales. In response, regulators overhauled clearing and settlement protocols to harmonize these timelines. Eventually, the industry moved to common settlement periods (and today is moving to T+1 for stocks). The goal is to reduce systemic risk by not having one part of the market out of sync with another. The post-’87 reforms in this area helped ensure that a trading firm wouldn’t suddenly find itself inadvertently short of cash purely due to settlement timing differences.
Improvements in Trading Infrastructure: The technology and rules of trading were also refined. For example, the NASDAQ market changed its rules so that market makers could not all withdraw simultaneously and leave a void in liquidity (as happened in 1987). The concept of “trade or fade” was reinforced – meaning market makers are obligated to either execute at their quoted price or remove the quote, but not just disappear. Also, systems for order handling were upgraded so that the ticker tape (price reporting) wouldn’t get hours behind, as it did during Black Monday due to overload. Exchanges increased capacity and introduced redundant systems to handle surges in volume. All these tech improvements were aimed at preventing the informational blackouts and logjams that exacerbated panic in 1987.
Restrictions on Certain Trading Practices: In the wake of the crash, program trading and portfolio insurance came under heavy scrutiny. While regulators did not ban program trading outright (it’s an integral part of modern markets in various forms), the NYSE did institute “trading curbs” to limit index arbitrage under certain conditions. For instance, one rule (the “Sidecar” or Rule 80A) would kick in during the late ’80s and ’90s if the Dow moved by a certain number of points, slowing down computer-driven index arbitrage trades. The idea was to tap the brakes on automated strategies when volatility spiked. Additionally, the crash more or less killed the popularity of portfolio insurance strategies – investors saw how they could fail catastrophically when everyone uses them simultaneously. In short, the financial industry learned to be more cautious with products that create positive feedback loops. Later on, after other incidents (like the 2010 Flash Crash), further rules around high-frequency trading and “circuit breakers” for individual stocks were added. But many of these ideas trace back to insights first gained in 1987.
Coordinated Global Oversight: Black Monday also led to greater international regulatory cooperation. The President’s Working Group on Financial Markets (sometimes nicknamed the “Plunge Protection Team”) was created in 1988 by the U.S. government, bringing together the Treasury, Fed, SEC, and CFTC to jointly monitor markets and respond to turmoil. This was a direct outcome of recognizing the fragmented oversight in 1987 – futures were regulated by one body, stocks by another, and they weren’t communicating effectively. Globally, bodies like the International Organization of Securities Commissions (IOSCO) took on more importance to coordinate cross-border market standards. Central banks also set up contingency swap lines and communication channels after 1987, so that if a crisis hit, they could act in concert to provide liquidity. Essentially, the crash taught regulators that markets had outgrown the old siloed regulatory framework, and that a more unified approach was needed both domestically and internationally.
Risk Management and Financial Innovation: On the industry side, risk managers at banks and investment firms went back to the drawing board. Value-at-Risk models and stress tests were adjusted to account for the possibility of extremely rapid, correlated sell-offs. The pricing of options changed too – after 1987, options markets started to reflect a higher likelihood of extreme moves (the “fat tails”), which is why to this day implied volatilities are not constant (the so-called volatility smile/skew appeared post-’87). In practical terms, this means investors became more aware that rare events do happen, and they began to demand better insurance or hedging for such scenarios, adjusting models like Black-Scholes which had underpriced crash risk. Portfolio insurance itself was largely discredited, teaching a lesson that models based purely on past market behavior can break down when everyone uses the same strategy.

All these changes can be summed up as the financial system’s attempt to learn from the mistakes of 1987. While they haven’t prevented volatility or crashes altogether (markets will always have downturns), these reforms have arguably made the market more resilient and orderly in the face of turmoil. For example, when severe volatility hit again in later years, exchanges were quicker to pause trading, and the presence of circuit breakers in March 2020 likely prevented an even worse panic during the COVID sell-off. The coordinated central bank actions in 2008 and 2020 also echo Greenspan’s approach in 1987 – provide ample liquidity to avoid a financial freeze-up. Each crisis is different, but Black Monday’s legacy lives on in the toolkit that regulators and investors now have to manage panic. The crash of ’87 became a case study in what to fix in the market’s plumbing and oversight, from the microstructure of trading to the macro role of central banks.

Black Monday in Context: Comparisons to Other Crashes

To truly appreciate Black Monday 1987, it’s helpful to compare it with other major market crashes. Market meltdowns have occurred before and since, each with its own triggers and consequences. Here, we’ll look at how 1987 stacks up against a couple of the most significant crashes in modern memory: the 2008 Global Financial Crisis and the 2020 COVID-19 Crash. These comparisons provide context for the uniqueness of Black Monday and the common themes that crashes share.

Black Monday (1987) vs. The 2008 Financial Crisis: The crash of 2008 (and the bear market of 2007–2009 surrounding it) was very different in nature from 1987. The 2008 crisis was rooted in deep structural problems in the financial system – it originated with a housing bubble, toxic mortgage-backed securities, and excessive leverage in the banking sector. When that bubble burst, it led to cascading failures (Bear Stearns, Lehman Brothers, AIG, etc.) and a credit crisis. Stock markets collapsed too – the S&P 500 lost about 50% from its 2007 peak to the 2009 trough – but the decline was spread over many months, punctuated by extreme days (like October 2008) of losses on bad news. The key difference is that 2008’s crash coincided with a severe global recession, arguably the worst economic downturn since the 1930s. It truly was a systemic banking crisis and required massive interventions: governments had to bail out banks, inject capital, and pass major reforms (like the Dodd-Frank Act in the U.S.) to shore up the financial system. By contrast, 1987’s crash, though dramatic, did not reflect underlying economic collapse – it was largely a one-day shock that did not lead to a recession or banking meltdown. In fact, U.S. GDP grew in 1987 and 1988. So, one could say 1987 was mostly a market-driven panic, whereas 2008 was an economic/financial crisis that spilled into markets.

The policy responses also differed. In 1987, the Fed’s liquidity promise was enough to stabilize things. In 2008, far more drastic measures were needed: rate cuts to zero, emergency lending programs, guarantees on money markets, and ultimately a $700 billion TARP bailout to recapitalize banks, among other measures. It was a long fight to restore confidence in 2008-2009. The recovery time frame shows this: stocks took roughly 4-5 years to fully recover from 2008’s crash, versus 2 years after 1987. Unemployment and economic output took even longer to recover after 2008. Simply put, 2008 had far more lasting impact on the real economy – millions lost their jobs, homes, and savings in the Great Recession. Black Monday, on the other hand, mostly impacted portfolios (and psyches) in the short run but didn’t throw the average person out of work or trigger a lending freeze.

However, there are also parallels. Both crashes led to significant regulatory changes. Just as 1987 led to circuit breakers and trading reforms, 2008 led to financial regulatory overhauls (like stricter capital requirements for banks and new oversight of derivatives). And in both cases, the role of the central bank as crisis-manager was highlighted. Ben Bernanke’s Fed in 2008, much like Greenspan’s in 1987, acted aggressively to backstop the system – though Bernanke had to go much further. The experiences of 1987 arguably laid some groundwork for the Fed’s willingness to intervene in 2008 (and again in 2020). Another commonality: investor panic and herd behavior were present in both. In late 2008, fear led to indiscriminate selling much as it did on Black Monday, even if spread over weeks. But fundamentally, 1987 was a short, sharp shock, while 2008 was a rolling crisis with fundamental imbalances behind it. Each taught different lessons about risk: 1987 about market mechanism risks and liquidity, 2008 about credit risk and leverage.

Black Monday vs. the 2020 COVID-19 Crash: In February-March 2020, global markets were rocked by the emergence of the COVID-19 pandemic. This episode had some uncanny similarities to 1987 in terms of market behavior, despite the very different cause (a pandemic-driven economic sudden stop). In late February 2020, after hitting all-time highs, the S&P 500 plunged into a bear market in a matter of just three weeks, one of the fastest descents ever. By late March 2020, U.S. stocks had lost roughly 34% from their peak, an extremely swift crash. During that time, there were multiple days where the Dow or S&P fell by 7%, 10%, even 12% – bringing back memories of Black Monday’s scale of daily loss (though still shy of 22%). In fact, Black Monday’s one-day record drop held until the COVID crash, when on March 16, 2020, the Dow fell almost 13% (its second-largest percentage drop ever). Over in Europe, some markets had their worst day since 1987 as well. Because of how fast and far markets were falling, exchange circuit breakers were triggered several times in March 2020, halting trading temporarily on big down days – a direct illustration of Black Monday’s legacy (those circuit breakers did not exist in 1987, but were standard by 2020). The halts perhaps prevented even more extreme single-day moves by forcing traders to pause and assess.

However, unlike 1987, the 2020 crash was tied to a clear external cause – a global health crisis – and was met with an astronomical policy response. The U.S. Federal Reserve and other central banks rolled out emergency measures even more aggressive than 2008: interest rates slashed to zero, trillions in asset purchases (QE), liquidity facilities for corporations and banks, etc. Governments passed multi-trillion dollar fiscal stimulus packages to support businesses and consumers during lockdowns. These responses were unprecedented in speed and size. As a result, the market recovery in 2020 was far faster than 1987’s – stocks bottomed on March 23, 2020 and then began a steep climb. By August 2020 (just about 5 months later), the S&P 500 had regained its February high, making it the fastest bear-market recovery on record. So while the initial pandemic crash was extremely sharp – in fact, some called it the fastest descent into a bear market ever – the rebound was also record-breaking. In 1987, remember, it took two years to make new highs; in 2020 it took only months. Part of the reason is the different nature of the shock (once investors believed the pandemic could be managed with stimulus and eventual vaccines, they looked forward to recovery), and part is the massive central bank support that effectively backstopped markets. It’s also worth noting that the 2020 crash did lead to a very sudden recession (the pandemic lockdowns caused a global economic contraction and a spike in unemployment to levels not seen since the 1930s). But that recession was unusually short – a few months – because of the extraordinary interventions and the unique nature of a pandemic recession. By late 2020 and into 2021, economies and markets were rebounding, even if some sectors were still struggling.

In comparing 2020 to 1987, one sees that market mechanisms had improved (no technical breakdowns in 2020 despite record volumes, thanks in part to better infrastructure and circuit rules), yet investor psychology remained the same – fear and uncertainty can still cause a stampede for the exits. The presence of modern trading algorithms and high-frequency trading in 2020 also echoes the program trading of 1987, though regulators have installed guardrails like price limit up/down bands to mitigate “flash” crashes. Both episodes underline that when unexpected bad news strikes (be it a virus or an exchange rate fight), markets can react with stunning speed. The big difference is we now have more robust crisis playbooks (developed in part from lessons of 1987 and 2008) to respond and limit damage.

Historical Perspective (1929 and others): If we zoom out further, Black Monday can also be contrasted with the granddaddy of crashes, the Wall Street Crash of 1929. In 1929, the market fell in two horrific days (12-13% on “Black Monday” and another 11% on “Black Tuesday” in October 1929, for about a 23% two-day drop, eerily similar to 1987’s one-day 22.6% drop). But back then, the collapse continued for years and ushered in the Great Depression – stocks ultimately fell ~89% from peak to trough by 1932. The policy response in 1929 was minimal or even counterproductive (tight money, no depositor insurance, etc.), which taught later generations what not to do. By contrast, 1987 showed that with the right actions (liquidity support, etc.), a stock crash need not wreck the economy. In many ways, Black Monday 1987 is viewed as a successful containment of a panic, whereas 1929 was an uncontrolled spiral. It’s also often noted that 1987’s crash, though scary, was the fastest recovery of any major crash in the past century – no other episode saw a market rebound that fast after such a steep fall, until perhaps 2020. This gives Black Monday a somewhat paradoxical legacy: it’s remembered for the drama of the day itself, but its aftermath was arguably one of resilience.

Lessons Learned from Black Monday

Black Monday 1987 taught both Wall Street and Main Street a number of important lessons – lessons about market behavior, risk management, and investor psychology that remain relevant today. Here are some of the key takeaways and lessons from the crash:

Markets Can Be More Interconnected (and Fragile) Than They Appear: 1987 demonstrated unequivocally that we live in a global financial system. A sell-off in Hong Kong or London can ripple to New York within hours. This was a relatively new concept at the time; today it might seem obvious, but Black Monday was the event that underscored globalization in markets. The lesson is that diversification across markets provides less protection during a true panic because correlations go to one – in a crisis, almost all markets can fall together. Investors and policymakers learned to monitor not just their own backyard but developments around the world. In practical terms, this means keeping an eye on overseas markets (for example, U.S. futures traders now routinely watch Asian and European market moves overnight). It also means that international cooperation is key in crisis response.
Liquidity and Market Structure Matter (A Lot): One reason the 1987 crash was so fast and deep is that market mechanisms failed to cushion the blow – liquidity evaporated and trading systems were overwhelmed. The introduction of things like circuit breakers was a direct lesson from this: give people time to think in a panic. Ensuring that exchanges have modern, robust systems and that there are rules to temporarily slow down trading in a plunge can prevent a bad day from turning into an outright crash. For investors, the takeaway is to understand that liquidity isn’t always there – in normal times you can trade easily, but in crises you might not be able to sell at a fair price. This is why risk management is crucial: you don’t want to be forced to sell into a vacuum. The crash led to improved risk controls at trading firms and clearinghouses (e.g. margin requirements that dynamically adjust with volatility). It reminded everyone that the plumbing of the financial system – how trades get cleared, how margins are managed, how information flows – can make the difference between an orderly sell-off and a chaotic collapse.
The Role of Psychology – Don’t Panic (and Don’t Follow the Herd): Perhaps the timeless lesson for individual investors is the danger of panic selling. Crashes, by definition, involve an emotional component where fear overtakes rational analysis. Those who dumped their portfolios on Black Monday turned paper losses into real ones – selling at the worst possible time – while those who held on saw their values recover in short order. As painful as it is to watch your investments plunge, maintaining a long-term perspective is crucial. History shows that even the steepest market declines have been temporary. In fact, many of the sharpest market rallies follow on the heels of a crash. For example, after the 1987 crash, the market bounced strongly; after the 2008 crash, 2009 saw a huge rally off the bottom. The lesson is to stick to your investment strategy. If you’ve built a sound, diversified portfolio that matches your risk tolerance and goals, then reacting frantically to a one-day or one-month plunge is usually counterproductive. In hindsight, crashes often look like blips on the long-term chart. As one finance saying goes, “Time in the market beats timing the market.” Black Monday reinforced that – those who tried to time their exit and re-entry around that event often fared worse than those who stayed the course.
Crashes = Opportunities (for the Prepared): Along with not panicking, savvy investors learned that a crash can present buying opportunities. When quality stocks go on sale at fire-sale prices due to indiscriminate selling, those with cash and courage can profit. For instance, if you had a “shopping list” of stocks you always wanted to own, Black Monday gave you a chance to buy them 20-30% cheaper overnight. Many great fortunes have an element of being greedy when others are fearful (to paraphrase Buffett). The key lesson is not to celebrate crashes – they are scary and harmful in the short run – but to realize that market downturns are inevitable and temporary, and thus one can view them as chances to rebalance or invest new capital at lower prices. Of course, this is easier said than done in the heat of the moment, which is why having a plan in advance helps. Crashes also teach the importance of keeping some liquidity (cash or equivalents) in a portfolio if you might want to deploy funds in a downturn.
Innovation and Leverage Cut Both Ways: Black Monday was fueled in part by new financial innovations (portfolio insurance, futures arbitrage algorithms) and by the use of leverage (borrowing to invest, or effectively leveraging via derivatives). The lesson here is that new financial products can carry hidden risks, especially when many players adopt them simultaneously. Innovations need stress-testing for worst-case scenarios. Similarly, leverage can boost returns in good times but becomes devastating in bad times – margin calls were a factor in 1987’s cascading sell-off. Investors learned to be wary of strategies that promise steady gains with “safety nets” that might fail under pressure. This is applicable even today – think of complex products like volatility ETFs that blew up in a day in 2018, or certain mortgage derivatives in 2008. The general rule: if you don’t understand how an investment might behave in a severe market drop, be cautious. Simpler portfolios (with appropriate asset allocation) often hold up better when complexity melts down.
The Importance of Regulatory Vigilance and Adaptation: Regulators took many lessons from 1987. They learned that they must evolve rules as markets evolve. As trading became more electronic and global, oversight had to adapt. Black Monday’s lesson to regulators was not to be caught complacent – they have to imagine worst-case scenarios and put safeguards in place beforehand. It also highlighted that different markets (stocks vs futures, etc.) needed to talk to each other. Post-1987 measures like cross-market circuit breakers and inter-market coordination committees were aimed at that. This is an ongoing lesson: even in recent times, with the rise of high-frequency trading, “flash crashes” have occurred (like in 2010), prompting further tweaks to rules. The learning never stops, because markets keep changing with technology and innovation.
Central Banks as Crash Firefighters: 1987 underscored the pivotal role a central bank can play in halting a crash from turning into a wider crisis. The Fed showed that by acting quickly to assure liquidity, it could stabilize markets. This has influenced central bank behavior ever since. The lesson (which some praise and others criticize) is that markets expect central banks to step in forcefully during extreme downturns – which we’ve seen in 2008 and 2020. While this can create a moral hazard (investors taking on more risk assuming the Fed “has their back”), it’s also become an entrenched part of crisis management. For better or worse, the 1987 playbook of injecting liquidity and calming statements is now standard practice. For investors, knowing this, one might take a cynical lesson: “Don’t fight the Fed” – if the central bank is pumping support, it may not be wise to remain overly bearish. On the other hand, one should be mindful that the Fed can’t always prevent losses (it didn’t prevent the 2008 crash, though arguably it mitigated worse outcomes).

In conclusion, Black Monday 1987 taught us about both the pitfalls and resilience of the financial markets. It was a day of chaos that revealed how quickly things can unravel, but also a lesson in how swift action and level-headed strategy can contain the damage. For the investing community, it reinforced age-old wisdom: be prepared for downturns, avoid knee-jerk reactions, and remember that over the long run, markets tend to recover and reward patience. For regulators and professionals, it spurred improvements that have arguably made markets safer and more robust against certain kinds of collapse. Crashes will happen again – they are a recurring feature of market history – but each episode, Black Monday included, leaves a legacy of knowledge that helps investors and institutions navigate the next storm. As a part of the Investment Compass Series, the story of Black Monday serves as both a cautionary tale and a source of guidance. It reminds us that even on the darkest market day, there are lessons to light the way forward for those who pay attention.