What Caused the 1987 Stock Market Crash?

The 1987 Stock Market Crash: What Caused It?

The stock market crash of 1987, also known as Black Monday, was one of the most significant financial events of the 20th century. On October 19, 1987, the Dow Jones Industrial Average (DJIA) dropped 508 points, or 22.6%, the largest one-day percentage drop in history. Many investors were left wondering what caused such a significant market drop. In this article, we will explore the factors that led to the1987 stock market crash.

Introduction to the 1987 Stock Market Crash

To understand the 1987 stock market crash, it is essential to look at the broader economic conditions of the time. In the mid-1980s, the United States was experiencing a period of economic growth and stability, with low inflation and low unemployment rates. This led to a surge in investor confidence and increased investment in the stock market. However, this boom was not without its faults.

The Rise of Computerized Trading

One significant factor that contributed to the 1987 stock market crash was the rise ofcomputerized trading. In the 1980s, computerized trading systems, known as program trading, were becoming increasingly popular. These systems allowed traders to buy and sell large volumes of stocks quickly and automatically, based on predetermined market conditions. This led to a significant increase in market volatility, as these systems were designed to buy and sell stocks based on market changes, rather than long-term investment strategies.

The Role of International Markets

Another factor that contributed to the 1987 stock market crash was the role of international markets. In the months leading up to the crash, there was a significant increase in global economic uncertainty, particularly in Europe. This led to a decline in international investment, which had a significant impact on the US stock market. The crash was also exacerbated by the fact that many international markets experienced significant drops in the days following the US market crash.

The Impact of Overvalued Stocks

Finally, the 1987 stock market crash was also the result ofovervalued stocks. In the years leading up to the crash, many investors were investing in stocks that were significantly overvalued. This led to a market bubble, as investors continued to buy and sell stocks at inflated prices. When the market began to decline, investors began to panic, leading to a significant sell-off.

Investment Strategies for the Modern Investor

Despite the significant impact of the 1987 stock market crash, there are many investment strategies that modern investors can use to protect themselves from market volatility. One effective strategy is to diversify your portfolio, investing in a range of stocks, bonds, and other assets. It is also essential to have a long-terminvestment strategy, rather than trying to make quick profits through day trading or other short-term strategies.

Conclusion

In conclusion, the 1987 stock market crash was the result of a combination of factors, including the rise of computerized trading, global economic uncertainty, and overvalued stocks. While this event had a significant impact on the US economy, there are many strategies that modern investors can use to protect themselves from market volatility. By diversifying your portfolio and having a long-term investment strategy, you can help ensure your financial success, even in times of market uncertainty.