The Fruits of Civilization (26-9-3) Black Monday (19 October 1987)

 Black Monday (19 October 1987)

People started to understand the interconnectedness of markets around the globe. ~ American financial analyst Thomas Thrall

Stock prices are driven by expectation. Anticipating recovery from the recession following the 1979 oil shock, the US stock market began an ascent in the summer of 1982. This owed in large measure to the Reagan administration relaxing financial rules and easing antitrust law, as well as generous tax benefits for the wealthy and corporations. Working men and women did not share in this largesse.

Financial deregulation at this time laid the foundation for the financial system today. ~ Ha-Joon Chang

The bull market was further fueled by low interest rates and financial shenanigans (hostile takeovers, leveraged buyouts, merger mania, and junk bonds). These myopic practices spelled a reckoning, but it took years for the obvious to become apparent.

The business myth of the moment was that companies could grow exponentially simply by buying each other out. Further, the 1981 introduction of the IBM PC seeded undue optimism that computers might fuel sustained economic growth.

From late 1985 the US economy began slowing from a rapidly growing recovery from the early 1980s recession. With a “soft landing” in sight instead of recession, investor optimism continued to flower.

In August 1987, the Dow (Dow Jones Industrial Average), a US stock market index, was 44% higher than it had been at the end of 1986. Profit-taking ensued. The market began a gradual decline as the scent of uncertainty wafted.

The Arab-led oil cartel (OPEC) was in disunity. The price of crude oil was half of what it had been a year earlier. It looked like that only direction that the oil price was up, and that would spell further slowdown.

On 14 October, a larger-than-expected trade deficit was announced for the US. In response, US Treasury Secretary James Baker stupidly talked tough with trading partners.

On 15–16 October 1987, irascible Iran hit a couple of American-owned ships with missiles. In reaction the next day (17 October), the US stock market fell 4.6%. The UK stock market was closed that Friday because of a severe storm.

There is so much psychological togetherness that seems to have worked. ~ Andrew Grove, CEO of Intel Corporation, on the herd mentality of stock traders precipitating the Black Monday crash

On Monday, 19 October 1987, stock markets in the Far East started the world’s day with a plunge. Later that morning, the US retaliated to Iran’s provocation by shelling an Iranian oil platform.

Panic set in. The Dow dropped 22.6% on Black Monday: the single-largest drop in the market’s history.

$500 billion in US market capitalization evaporated: funny money indeed. Other stock markets around the world were similarly affected.

We believe it is an overreaction. ~ American business executive John Rolls on 20 October 1987, echoing common reaction by American business leaders

Following the crash, the US government insisted upon a system of circuit breakers to halt trading if stocks started to plummet too quickly. No consideration was given to stemming the irrational exuberance that repeatedly gave rise to market bubbles, such as the one just experienced.

A group of 33 eminent economists from various nations met, and issued a collective prediction in December 1987, that “the next few years could be the most troubled since the 1930s.” Instead, economies were barely affected by Black Monday. Economic growth picked up throughout 1988, with the Dow regaining its pre-crash level in early 1989.

The Fed intervened with massive dollops of liquidity to avert the crash turning into a crisis. Freshly minted Fed chief Alan Greenspan saw no reason that financial conniptions should damage the real economy.

The bull market that followed was led by computer software, then Internet stocks.

Black Monday didn’t lead to any meaningful reforms. ~ American financial journalist Dania Henriques