what happened to the stock market in 1987

what happened to the stock market in 1987

Quick answer: what happened to the stock market in 1987 was a sudden, global equity-market collapse on October 19, 1987 — known as Black Monday — when the Dow Jones Industrial Average plunged 22.6% in a single day. This article explains the background, detailed timeline, causes, policy responses, measurable impacts, and what lessons traders and platforms can draw today.

Background

Market run-up in the early‑to‑mid 1980s

In the years leading up to 1987, U.S. equities experienced a prolonged bull market that began after the 1982 trough. Rapid gains, rising institutional participation, and cross‑border capital flows set the stage for elevated valuations and increased trading volumes. Investors and institutions used new, increasingly computerized trading techniques to manage and hedge exposure.

Macroeconomic and geopolitical context

In the months before October 1987, markets faced several stresses: a large U.S. trade deficit, concerns about currency valuations and exchange‑rate volatility, and uncertainty about interest‑rate trends. These macro forces made markets more sensitive to shocks and raised the cost of hedging large equity exposures.

As of October 19, 1987, according to the Federal Reserve’s historical account, the trading environment was already fragile: elevated valuations and new trading practices combined with thin liquidity in some market venues.

Timeline of events (October 1987)

Pre‑crash market moves (mid‑October)

In the week before October 19, markets showed rising volatility. Between October 14 and October 16, 1987, many indices experienced sharp declines and intraday swings that signaled mounting selling pressure. Market participants returned from the weekend worried about earnings, currency moves, and liquidity.

Black Monday: October 19, 1987

On Monday, October 19, 1987 — Black Monday — the U.S. equity market opened amid heavy selling. The Dow Jones Industrial Average fell 508 points, a 22.61% decline — the largest one‑day percentage drop in its history. The S&P 500 and other major U.S. indices recorded comparable percentage losses. Trading was frenetic, order books thinned, and many market participants found it difficult to transact at quoted prices.

As of October 20, 1987, according to contemporary accounts and later Federal Reserve summaries, the New York Stock Exchange handled record share volume as market participants rushed to meet sell orders and to execute hedges.

Global propagation

The crash was global. Markets in Asia and Europe recorded large percentage declines that either preceded or accompanied the U.S. collapse. Some international markets fell even more, measured in local indices — for example, several markets in Asia and Oceania experienced daily losses exceeding 20%. The global nature of the downturn underscored cross‑market linkages and the speed at which equity stress can propagate across time zones.

Causes and contributing factors

Below are the principal contributions analysts and academic studies have identified. No single cause fully explains the event; instead, a combination of structural, technological, and behavioral elements amplified selling.

Program trading and computerized execution

Program trading — automated strategies that execute baskets of orders based on predefined rules — played a role in accelerating price moves. Index arbitrage and high‑frequency executions attempted to keep futures and cash markets aligned. When prices began falling rapidly, automated systems generated additional sell orders, feeding into the decline.

Portfolio insurance and dynamic hedging

Portfolio insurance is a dynamic hedging strategy that reduces equity exposure as prices fall, often by selling futures or other derivatives. As prices dropped on October 19, portfolio‑insurance strategies required more short positions in futures, mechanically increasing selling pressure. Many scholars and contemporaneous commentators cited the feedback loop created by dynamic hedging as a major amplifier of the crash.

Market structure and liquidity issues

Thin bids, wide spreads, and imbalanced order flow made liquidity scarce. Even large capital providers found it costly or risky to absorb sell orders. Where market makers or liquidity providers withdrew, prices moved sharply downward; this lack of depth converted sizable sell flows into large percentage moves.

Valuation, profit‑taking and investor psychology

Valuation concerns after a long bull run encouraged profit‑taking by some investors. Coupled with heightened uncertainty, negative news items, and a cascade of stop‑loss and margin calls, this created a self‑reinforcing cycle: price declines prompted more selling, which in turn triggered additional automated and discretionary selling.

International and policy triggers

Currency tensions, particularly around the U.S. dollar and its valuation relative to other currencies, influenced investor behavior in October 1987. News reports and trade concerns in the weeks before the crash contributed to an environment where a shock could have outsized market effects.

Immediate market and policy responses

Exchange and trading responses

On Black Monday, some exchanges used emergency procedures to manage trading. In extreme cases, trading was delayed, and trading crowds on floors struggled to process the flood of orders. Exchanges and regulators later identified the need for clear, automatic mechanisms to slow markets during extreme moves.

Central bank and government actions

The Federal Reserve and Treasury officials acted quickly to provide liquidity and to reassure markets. The Fed’s interventions — including the assurance that it stood ready to provide liquidity — helped calm funding markets and restored some confidence. That response established an operational precedent: central banks are willing to provide liquidity to functioning markets in times of acute stress.

Market impact and metrics

Index losses and trading volumes

• Dow Jones Industrial Average: −22.61% (508 points) on October 19, 1987 — the largest one‑day percentage drop in its history.
• S&P 500 and other major indices posted large single‑day declines in line with the DJIA.
• NYSE trading volume set records as investors rushed to trade and hedge positions. For many market observers, the magnitude of daily volume and rapid fall in prices were central indicators of systemic stress.

Market capitalization and value wiped out

Estimates of global market value wiped out on or around October 19 vary by method and scope. Depending on measurement, global equity market capitalization losses ran into the hundreds of billions or more than a trillion dollars when comparing market values before and immediately after the selloffs.

Sector and regional impacts

The crash affected virtually all sectors, but cyclical industries and financials experienced notable declines due to leverage and high exposure to market movements. Several regional markets outside the U.S. recorded double‑digit or greater percentage drops in one day, in some cases exceeding the U.S. declines measured by local indices.

Aftermath and regulatory reforms

The 1987 crash prompted a set of reforms and operational changes designed to reduce the likelihood that similar conditions would recur or to moderate their impact.

Introduction of circuit breakers and trading curbs

One of the most visible reforms was the development and later implementation of automatic halts and circuit breakers. These mechanisms pause trading or impose restrictions when prices move beyond preset thresholds, giving market participants time to reassess and preventing mechanical, feedback‑driven selloffs.

Changes to market surveillance and program‑trading rules

Regulators and exchanges strengthened surveillance of program trading, clarified order‑handling rules, and improved cross‑market communications. Measures sought to improve transparency, match buyers and sellers more effectively, and ensure that automated strategies could not, by design, create destabilizing cascades.

Monetary policy precedent

The Federal Reserve’s rapid provision of liquidity set a precedent for central‑bank crisis response. The willingness of central banks to act as lenders of last resort in funding markets and to coordinate where necessary became an accepted tool for crisis management in later episodes.

Economic consequences and market recovery

Short‑term economic effects

Despite the dramatic market declines, the 1987 crash did not directly trigger a sustained global recession. Credit markets experienced strain and investor confidence was shaken, but immediate spillovers into the real economy were limited compared to prior financial crises.

Recovery path of markets

Markets rebounded to some degree in the weeks and months after October 1987, with partial recoveries and renewed volatility. By late 1987 and into 1988, many indices had regained a portion of lost ground. Over a longer horizon, markets absorbed the shock and continued to trend based on fundamentals and macro developments rather than the single event alone.

Analysis, academic research, and debated explanations

Empirical studies and models

Researchers have analyzed the crash extensively. Key findings emphasize the combined role of portfolio insurance, program trading, inadequate liquidity, and investor herding. While portfolio insurance is often cited as a mechanical amplifier, empirical work indicates that liquidity and psychology were also decisive: when liquidity providers step back, even moderate sells can produce outsized price moves.

Ongoing debates and lessons

Debates continue about which factor was dominant. Some scholars argue that portfolio insurance was central; others stress market‑microstructure failures and coordination problems. Regardless of precise attribution, consensus emerges around practical lessons: the importance of liquidity, robust market‑pause mechanisms, careful design of automated strategies, and central‑bank readiness to supply liquidity when needed.

Legacy and long‑term significance

Market structure evolution

The crash accelerated modernization of market infrastructure. Exchanges improved order‑routing, transparency and matching engines; regulators implemented safeguards to reduce runaway automated selling; and market participants developed more sophisticated risk‑management practices.

Policy and crisis management lessons

Black Monday helped shape how policymakers think about systemic risk, liquidity provision, and the interaction between automated trading and market stability. These lessons informed later regulatory responses to episodes of stress and the design of safeguards like circuit breakers.

Cultural and historical memory

Black Monday remains a reference point in financial history. The image of a single day wiping out a large fraction of market value is often invoked when discussing program‑trading risks, liquidity crises, and the need for robust controls.

Practical takeaways for traders and platforms

• Understand that automated strategies can amplify price moves; stress‑test algorithms under extreme scenarios.
• Prioritize liquidity and avoid strategies that require forced selling into thin markets.
• Use well‑tested risk controls and consider order types that limit market impact.
• Platforms and exchanges should maintain clear contingency plans and robust market‑pause mechanisms.

If you want to study market behavior and risk controls on a modern platform, explore Bitget’s educational resources and consider using Bitget Wallet for secure custody of assets and for on‑chain experimentation with risk‑management tools (note: this is informational and not investment advice).

See also

• Circuit breaker (finance)
• Portfolio insurance
• Dow Jones Industrial Average
• List of stock market crashes

References

• Federal Reserve History, "Stock Market Crash of 1987" (summary and chronology). (As of October 20, 1987, according to Federal Reserve History, the DJIA dropped 22.6% on October 19, 1987.)
• Encyclopædia Britannica, "Black Monday (1987)" (historical overview and causes).
• Investopedia, "Causes of the Black Monday 1987 Stock Market Crash" (analysis of portfolio insurance and program trading).
• Corporate Finance Institute, "Black Monday Market Crash" (market metrics and aftermath).
• Goldman Sachs research summaries and contemporary news reports (market impact and global spread).

Further reading and resources

For hands‑on practice with modern trading mechanics and to explore market risk controls, see Bitget’s learning hub and product guides. If you manage on‑chain assets, Bitget Wallet supports secure custody and common Web3 interactions while emphasizing user control and safety.