The Crash of '87 and What It Means for You

Written by: Brian Levitt , Senior Investment Strategist

The New York stock market crash of 1987 happened 30 years ago when, on October 19, the Dow Jones Industrial Average (DJIA or the Dow) plunged by a then-record 508 points—a 22% decline in the index.

I was a sixth-grade latchkey kid at the time, with an older sister who spent that particular afternoon watching ABC’s lineup of General Hospital and The Oprah Winfrey Show. (The topic: TV’s New Leading Men: Michael Pare from the series Houston Knights; John Stamos from Full House; and Jack Scalia from Remington Steele.1)

I can still remember ABC News “interrupting our regularly scheduled programing to bring you a special report.” The late Peter Jennings announced, “There has never been a day like it.” A few hours later, my old man walked through the door, and I asked, “Dad, do we own any stocks?” The look on his face told me all I needed to know.

Jennings was only partially right. In many ways there hadn’t been a day like it: 595 million shares traded hands (the prior record was 302 million); 95 stocks in the S&P 500 Index weren’t open for trading by 10:00 a.m.; record margin calls and program trades overwhelmed the system. At the risk of nitpicking, I should add that October 19, 1987, wasn’t the largest down day in percentage terms in U.S. stock market history. (That indignity belongs to December 12, 1914, when the Dow saw a decline of 24%. The change for that day was calculated on the previous close nearly six months earlier: The stock exchange was shut in July of 1914 as World War I began—and it did not reopen until December 12 that year. 2 ) By comparison, the notorious Black Tuesday crash of October 24, 1929, that preceded the Great Depression, saw stocks fall by only 13%.

Many of the statistics quoted in ABC’s special report appear quaint in retrospect:

Currently, a 500-point down day would only amount to a 2.2% drop in the Dow Jones Industrial Average. It has happened 17 times since 1987.

Today, it is not uncommon for 1–1.5 billion shares to be traded on a given day.

On October 19, 1987, Apple was only 6% of the size of IBM, then the largest company in the nation. Presently, Apple Inc.’s market capitalization is 6X (or 600%) that of IBM’s.

We might snicker at the relatively paltry trading volumes, the antiquated computer systems, the mobbed trading floors, the out-of-date news reports, and Sam Donaldson’s hairstyle. Yet the conversations taking place that day were not unlike those we have had over the subsequent 30 years and still, in some instances, those we have today.

What were the reasons given to the American public to explain the stock market crash?

A weak dollar: Secretary of Treasury James Baker’s strategy of dollar devaluation was viewed as a gamble and not favorably received by the Germans and Japanese. Baker believed that “we are engaged in a life-or-death struggle here to preserve the world economy.”

Inflation: Following 59 months of economic expansion, a steep and prolonged decline in the consumer price index, and persistent dollar weakness, inflation began to rise by the beginning of 1987. Many investors believed that the stagflation of the 1970s was coming back.

Trade deficit: The deficit, despite the sharp decline in the dollar, had not been noticeably reduced. The United States was said to be losing the future to the Japanese.

Conflict in the Middle East: On that October morning of the market crash, U.S. warships attacked an Iranian oil production platform in the Persian Gulf in response to a missile that had hit an American tanker off the coast of Kuwait the prior week. In an example of historical irony, the fear then was that America was now fighting Iraq’s battle against Iran.

Computer trading: The exchange’s computer systems were deemed ill-equipped to handle the increased trading volume and were viewed as an ominous sign for the future of the U.S. stock market.

Does it all sound familiar?

Investors who woke up on October 20, 1987, would have been hard-pressed to envision the U.S. stock market not only posting positive returns for the year (the Dow had been up by as much as 40% year-to-date, prior to the crash) but also returning 371% over the next decade—and 617% by the end of the secular bull market in 1999.

Imagine receiving an inheritance of $100,000 on Friday, October 16, 1987—the eve of the famous Black Monday crash. If you had put your money that day in the Dow, then by the following Monday it would have been worth $77,420. Ouch. However, by the following October 20 th of 1988, your investment would have once again surpassed $100,000 and 30 years later, would be worth more than $2.1 million today, around $700,000 more than if you had slowly dollar-cost averaged your inheritance into the market over a long period of time (Exhibit 1).

I recently asked my father how he responded to the crash of 1987. He said, “I didn’t do anything. I was a young man, and I was in it for the long term.” I suppose apples don’t fall far from trees.

Coincidentally, the Number One song on America’s pop charts on the day of the crash was “Lost In Emotion” by Lisa Lisa and Cult Jam. What song ended the year at number 1? “Faith,” by George Michael. How apropos.

Learn more about how to invest for the long term by visiting challengetheindex.com

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1 In defense of my sister, we only had a few channels. Also, I let her watch General Hospital and The Oprah Winfrey Show on Mondays so that I could watch Alf and Monday Night Football at night.
2 The New York Times, “Setting the Record Straight on the Dow,” October 26, 1987.