Recounting Black Monday 25 Years Later

Working as a trader on the New York Stock Exchange for 48 years, Art Cashin has seen it all. It is one day in October 1987, however, that he will never forget.

Cashin, currently director of floor operations with Swiss bank UBS, recalls Oct. 19, 25 years ago. “At the time, I was running the floor for PaineWebber. Monday morning I got up well before dawn and saw that Hong Kong was down about 10% and other markets were looking equally weak before their openings. I headed for the NYSE to check on our systems and staffing. I reached out asking the team to get in early,” he says in a note to clients.

Systems and staffing were fine on that fateful day in the fall of 1987. There were other issues, however, that resulted in the largest single-day percentage decline in the Dow Jones Industrial Average on record. The blue chip index finished the day down 22.6 percent or 508 points, a hitherto unseen number. Earlier in the year, the stock market had fared very well, rallying 43 percent through Labor Day. 

Troubles Start in Late Summer 

“The rally topped out about August 25th with the Dow hitting 2,722. Interest rates had begun creeping up amid concerns of early signs of inflation,” Cashin explains some of the problems vexing the market, which began to decline in earnest of Oct. 19.

He cites currency woes between the United States and Germany, fears of new taxes on corporate takeovers and worries about Nancy Reagan’s health as reasons for the market decline before the crash. 

The worries intensified the Friday before Black Monday. “Friday, the 16th was an option expiration day. There was a very bad storm in London and that market closed, which forced more people to seek liquidity in New York. Stocks faced a steady wave of selling,” says Cashin. 

Over the weekend, more rumors were circulating, including a U.S. standoff with Iran and tax changes in Japan and Germany. Renewed remarks by Treasury Secretary Baker on television intensified the disagreement over the dollar’s value, especially with Germany. 

Market observers believe that these macroeconomic issues led to the decline of Asian and European markets. These declines precipitated and kick-started the big sell-off in the United States. 

Program and Portfolio Insurance Part of the Problem 

Art Cashin recounts his experience: “Back on the floor, the situation felt more unreal. Orders flowed in faster and faster and the tape ran later and later. (The tape was linear and the human eye can only recognize a certain number of symbols per second, 900 I think. To run faster than that would make the tape an unreadable blur. Traders can trade faster than the maximum reading speed—so the tape ran late.) One broker said it was like a bizarre dream sequence—nothing seemed real.”

The incessant wave of selling that made the U.S. performance worse than overseas was later attributed to new practices such as portfolio insurance and program trading. In an interview with Joel Ramin, Paul Tudor Jones, a famous hedge fund manager explains the concept of portfolio insurance. 

“There was a tremendous embedded derivatives accident waiting to happen in the crash of ’87 because there was something in the market [at] that time called portfolio insurance that essentially meant that when stocks started to go down it was going to create more selling because the people who had written these derivatives would be forced to sell on every down-tick.”

Some of this portfolio insurance was executed by computer programs, which also executed stop-loss trades, says New York Stern professor Richard Sylla in an interview with the Wall Street Journal. The combination of the two led to only sellers and no buyers, a deadly combination. 

Market Saved by New York Fed 

The following Tuesday again proved to be dangerous, according to Cashin. “The Dow opened up about 200 points Tuesday to a round of cheers on the floor. But, stocks quickly turned lower. The 200-point gain was erased and the Dow went negative, accompanied by an audible gasp on the floor. Soon it was nearing -100 and trading was being halted in several of the Blue Chips that make up the Dow.” 

He adds that banks then shut down credit lines to market makers. This precluded them from providing liquidity, which caused even further selling. Luckily for the markets, the New York Fed President Gerry Corrigan persuaded the banks to reopen liquidity lines. 

“They were reluctant but Corrigan ultimately cajoled them. The credit lines were reopened and the halted stocks were reopened. Best of all, the market started to rally and closed higher on the day.”

Since the underlying economy was intact, the market also had a positive close for the calendar year 1987, but did not manage to recoup its August highs for another two years.

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