I remember learning about stocks for economics class in 1987. This was my first exposure to what a stock was—a fractional share of ownership in the business it represents—and to how important they were to the economy.
I’m afraid I wasn’t initially very interested in stocks. However, my timing couldn’t have been better: the biggest single-day loss in the stock market happened on October 19th of that year. The Dow Jones Industrial Average plummeted 508 points in a single day, or 22.6% of its total.
Interestingly enough, I have also lived through the second biggest single-day percentage drop in the history of the Dow. That happened on March 16th, 2020, just as the coronavirus pandemic began to grip the finance and business worlds, and I got to witness that distant second place: a 12.9% decline.
The 1987 crash came to be called Black Monday, after its infamous predecessor Black Tuesday. In financial jargon, black is indicative of a loss, and both of these days saw gut-wrenching losses in the stock markets.
October 19th. 1987 began like a lot of trading days at the New York Stock Exchange. There was a bit of selling pressure for some reason—maybe there was a negative news story, or perhaps just a rumor, but the day began slightly negative, which is perfectly normal for stock markets.
Unfortunately, there was a new tool being used on Wall Street at the time. For the first time, computers were now fast enough to execute trades on their own, based on breaking news or any kind of economic update that fit within previously set criteria.
These were simple rules-based programs, sort of the great-grandparents of more commonly known social media algorithms. These algorithms meant traders could take advantage of breaking news much, much faster than the other (non-computer-using) traders, thus giving them an enormous financial advantage.
I should point out that this is just one way to trade—racing to trade the news—but day-trading was common enough back then to cause a flood of additional selling. That’s the thing about a race like this: it can be a race of lemmings off a cliff if herd behavior takes hold.
There was certainly a lot of lemming-like behavior on that day, but there were also clear-headed folks who were nevertheless baffled by the sheer size of the panic. This was the biggest one-day loss ever for stocks, and there didn’t seem to be any major economic earthquake or apparent cause.
Quick side-note: lemmings don’t really commit mass suicide, but they do exhibit some herd-like behavior, so I’m keeping it.
1987’s Black Monday is a distant memory to me. I remember looking through the newspaper for stock quotes for class, but I don’t really remember being worried about the massive crash that had just occurred.
Unlike the next biggest crash (at the start of the pandemic), Black Monday didn’t have any kind of major economic panic associated with it. It did lead to some interesting innovations that were in place on that March 2020 day.
One of these innovations is called a circuit-breaker. This means that the New York Stock Exchange will automatically stop all trading for a limited amount of time, provided the S&P 500 (viewed as a better measure by most investors than the Dow) drops more than 7% in a day, the stock market’s algorithm (ironic? maybe just a little bit) will trigger a halt for 15 minutes.
If the market continues to fall and goes below 13% in a single day, a second 15 minute halt is triggered. These little halts are designed to get people to question whether they should continue selling all their stocks at a loss, basically. If you can pause the herd psychology for a moment, perhaps you can break the spell.
Finally, if there’s a truly big single-day crash—over 20%—trading for the rest of the day stops. These halts are across all major US financial stock exchanges, including the Dow, S&P, and NASDAQ. I got to witness one of these in real time on March 16th, 2020.
There’s also a much better awareness today that algorithms can seem to have a mind of their own, and this overlaps nicely with persistent mistrust of AIs that can hallucinate.
Stock market crashes can invoke fear across the entire world, causing even the most stoic among us to panic. They are events worthy of our time and attention.
Have you ever lived through a crash? What were your own feelings when you lived through them? Were you bored and disconnected like 12-year-old Andrew, or were you worried about the future?
I’m worried about the role of uncontrolled debt in our stock market. A lot of Americans are living way behind their means and using a revolving door of credit to finance their lives. That’s what caused the Great Depression. You recently wrote about Charles Ponzi…I worry that the whole shebang is one huge Ponzi scheme waiting to fall. Some say that it’s ok that the US debt can’t be entered into a regular calculator in standard notation, that we owe the money to ourselves. I’m skeptical. Do we owe the money to ourselves or to our descendants? Those are different ideas.
The first thought that crossed my mind when reading your lines about the pandemic-related crash was how it was the first time I got exposed to the concept of circuit-breakers, and how my first thought was: "What's the point? You're just delaying the inevitable." But after a few minutes of thinking, I intuitively came to the understanding that it's just there to prevent panic-triggered herd behavior. It's the equivalent of forcing yourself to count to 10 when you're angry. It's kind of funny that, no matter how sophisticated we get in terms of technology and institutions, in the end we still end up building "Take a timeout and a deep breath" mechanisms into our systems, just because at the end of the day, we're still emotional, silly humans.