Lessons From Black Monday, 25 Years Later

Crowds gather in front of a monitor in the window of Dean Witter Reynolds, checking on the course of the stock market the day after Black Monday Photograph by Marty Katz/Time Life Pictures/Getty

Twenty-five years ago, on Oct. 19, 1987, the Dow Jones Industrial Average plunged 508 points, or 22.6 percent. The anniversary of Black Monday is an opportunity to reflect on similarities between that era and this—volatility, investor distrust, concerns about the global economy—even as today’s market, dominated by high-speed trading algorithms, would be almost unrecognizable to the humans who shouted buy and sell orders on that panicked day.

It’s also an excuse to wade through some of the statistics generated by the tremendous activity of that day, and the broad trends in investing that followed. Swings of 500 points now happen with some frequency: The Dow has fallen more than 600 points seven times since 2000, and it posted huge daily gains throughout that period as well. The market trades at a much higher level now, of course. A 22.6 percent fall today would be the equivalent of 3,061 points.

The Dow opened at 13,545.33 this morning—a 774 percent rise from Black Monday’s close of 1,738. Activity is way up, too. Average daily volume for U.S. equities was 6 billion shares in the third quarter of 2012. That’s up tenfold from the 600 million shares transacted on Oct. 19-20, levels which were themselves a spike from the average at the time. More than 19 billion shares changed hands in the May 2010 “flash crash,” when the Dow fell 999 points before recovering.

As devastating as Black Monday was to investors’ portfolios in 1987, only about a quarter of Americans owned equities at the time. Just 16 percent of Americans owned equities in 1983, and about 30 percent did in 1989, according to the Investment Company Institute (PDF). Today, a similar fall would have a much larger impact, with more than half of Americans invested in the stock market in some way, as measured by Gallup. That measure is down, though, from 61 percent in December 2009. Investors are shunning stocks and mutual funds, withdrawing $440 billion from equity mutual funds since 2008.

Anyone who sold at the market low obviously took deep losses. But, as Joshua Brown, who blogs as the Reformed Broker, points out, the market quickly regained its form. Investors who bought at the bottom enjoyed an extraordinary 13-year bull run that ran to the height of the tech stock bubble, and then all-time market highs in 2007. What came next, of course, was panic of an altogether different kind.