Black Monday Was Exactly 36 Years Ago, And 1 Market Condition Is Dangerously Similar Today

Thursday marks the 36th anniversary of the worst trading day in the history of Wall Street.

On Oct. 19, 1987, the Dow Jones lost 22.6% in one single day, which is now known as "Black Monday." The market lost $500 billion that day and the S&P 500 surpassed 20% in losses.

Today, some market conditions are dangerously close to those that led to1987's crash. What's similar and what’s different in 2023?

Black Monday: Oct. 19, 1987

The infamous Black Monday gave way to one of the greatest lessons in modern market history.

A market crash unleashed a global financial crisis that cost the world an estimated $1.71 trillion, according to an article in the journal California Management Review.

The crash was primarily a result of the early and widespread introduction of programmatic trading technology across Wall Street.

1987 had begun as a bull year and major indexes were registering significant gains as the year went by. By late August, the Dow Jones was up 44% year-to-date. 

Yet mid-October saw the beginning of the end for that bull cycle. Bad macroeconomic news like a high U.S. deficit and the subsequent loss of value for the U.S. dollar began to pierce investor confidence. On Oct. 14, five days before Black Monday, several sectors began losing value, and on the Friday of that week, the Dow Jones lost 4.6% in one day.

On the following Monday, a large number of investors submitted sell orders in an effort to escape more losses. Several exchanges worldwide were also crumbling, including major ones in the U.K., Japan, Hong Kong and New Zealand, where the stock market lost a record 60%. 

Programmatic trading orders were relatively new to Wall Street and the market was not aware of the damage they could cause when all were executed at once. Many investors had placed stop-loss orders on their stocks, which automatically sell the shares if they fall below a certain value. 

These were a big feature of a previously-untested product from U.S. investment firms known as "portfolio insurance." Automated selling caused a vicious cycle by which, a drop in price caused portfolio insurers to sell, causing further price declines, feeding into an endless cycle of loss.

As the value of stocks declined, the cascade of sell orders became larger and larger, and exchanges had no instruments to stop the downward spiral.

What's Similar Today To 1987?

In recent days, several financial news outlets, social media influencers and financial analysts pointed out that market conditions today mimic those that led to the Black Monday crash.

Most significant is the unusual relation between Treasury bond yields and stocks. Just as it was in 1987, bond yields are rising in parallel to the stock market. This week, the two-year Treasury note reached a 17-year high with a 5.2% yield.

Yields on Treasury bonds rise as investors sell the asset, causing the price to drop. With a fixed sell-back value and a diminished price, the yield becomes higher.

According to economist Mohamed El-Erian, chief economic adviser at Allianz, geopolitical instability is causing foreign investors to shy away from U.S. bonds, leading to a lack of buyers for the asset class, which in turn reduces its price.

In an opinion column for Bloomberg, Financial Times veteran analyst John Authers described how the yield spike curve for bonds in 2023 is similar to that of 1987.

As yields on bonds rise, equity prices tend to suffer as investors find the low-risk appeal of bonds more enticing and sell stocks in order to add bonds to their portfolios. Yet today's equity market is becoming surprisingly resilient to rising bond yields.

Moreover, the Nasdaq's progress this year is also worryingly similar to that of 1987, right before the crash. Yet these analytical traits are not necessarily a prediction of a soon-to-be crash in the stock market.

2023 Is Not 1987, But ‘Something's Gotta Give'

The coincidences between today's market conditions and those that preceded Black Monday are certainly spooky, but they don't guarantee a market crash anytime soon.

As a result of Black Monday, the NYSE and the NASDAQ introduced automated circuit breakers, which halt all trading for 15 minutes if losses of more than 7% are registered in a single day.

Adding to the safety measure of circuit breakers put in place by the SEC, Authers argues that several variables are different today to those of 1987.

Specifically, corporate earnings are reaching a 15-month high, as per the latest projections, which is yet another proof of how resilient the U.S. economy remains, regardless of high inflation and rising interest rates.

In 1987, macroeconomic conditions were worse than they are now. Before the crash, the market had experienced a week of sustained losses for more than 10%, Interest rates were higher and inflation was accelerating.

Yet Authers doesn't see a good augur in the fact that bond yields and equities are following a similar path, and says that "it's reasonable to expect that something will give soon."

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