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October 1987 – Stock Market Panic: Black Monday

Over several days in October 1987, stock markets around the world lost significant value. The worst damage occurred on Monday, October 19, 1987—now known as Black Monday—when exchanges plummeted. The Toronto Stock Exchange 300 Composite Index (TSE 300) plunged 407.20 points that day to close at 3,191.38—losing 11.3% of its value, or $37 billion. Investors, both individual and corporate, suffered significant financial losses. In the United States, the Dow Jones Industrial Average tumbled 22% on Black Monday alone.

Mirroring global trends, the TSE in 1987 had been on a steady rise for approximately five years. It opened that year at a value of just over 3,000, and by July it had edged above the 4,000 mark. A downturn started in August, but how did it turn into panic selling by mid-October?

Overall, the world’s major economies seemed healthy going into 1987, as the recovery from the 1981–82 recession continued into its fifth year. These economies were growing, with inflation and unemployment generally either falling or remaining stable. However, as the year progressed, it became apparent that trade imbalances were huge and increasing among the major OECD countries—the United States’ deficits were mounting; Japan’s and Germany’s trade surpluses were growing at a similar rate. Canada, for its part, had heavy budget and current-account deficits.

It was not long before dramatic international events tipped the scale. In February, Brazil announced it would stop making interest payments on its external debt, causing a slide in the value of the U.S. dollar and renewed concerns over exchange rates. In May, the U.S. Congress passed a trade bill that ushered in a new round of trade conflicts, jeopardizing the Uruguay Round of the GATT. Just before the panic, statements by the U.S. administration seemed to imply that the U.S. dollar needed to fall faster and farther to correct their widening trade deficit. On October 19, newspapers were filled with stories regarding possible U.S. military action in the Persian Gulf.

At the time, economists feared that if the U.S. economy faltered, the entire world economy would stumble and fall into recession again, as it had in 1981–82. Many observers now believe the panic of Black Monday simply reflected a spreading fear that the world situation was rapidly becoming unmanageable.

Following Black Monday, however, fears of a global recession passed rather quickly, as central banks moved swiftly to buoy credit conditions and the market regained confidence in the global economy. Economies stayed healthy until the early 1990s and stock markets eventually climbed back up to their pre-panic values. In August 1989, the TSE 300 closed above 4,000 for the first time since the 1987 panic.

Links

Dow Jones Averages
Source: Dow Jones Indexes
http://www.djindexes.com/jsp/industrialAverages.jsp?sideMenu=true

Toronto Stock Exchange Homepage
Source: Toronto Stock Exchange
http://www.tse.com/

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