A Day of Carnage in the Trading Rooms

By October 19, 2021Economics, Markets
The Hutch Report

Thirty-four years ago, on Oct. 19,1987, the Dow Jones Industrial Average plunged 22.6%, its largest one-day percentage-point drop ever.

In comparison, here are five of the worst stock market crashes in US history, based on daily percentage losses (source: ajc.com):

Five Worst Stock Market Crashes in US History

Oct. 19, 1987

Percentage change: -22.61 percent

About: Known as “Black Monday,” this devastating crash began in Hong Kong, spread to Europe and then hit the U.S. hard.

Oct. 28, 1929

Percentage change: -12.82 percent

About the crash: The Wall Street Crash of 1929, also known as the Great Crash or the Stock Market Crash of 1929 started on Oct. 24 and signaled the beginning of the 12-year Great Depression. Black Monday, the fourth and worst day of the crash, saw a drop of 12.82 percent.

Dec. 18, 1899

Percentage change: -11.99 percent

About the crash: During the Panic of 1896, the U.S. experienced an acute economic depression caused by a drop in silver reserves and deflation.

Oct. 29, 1929

Percentage change: -11.73

About the crash:  Black Tuesday was the fifth day of the the Wall Street Crash of 1929, also known as the Great Crash or the Stock Market Crash of 1929 that started on Oct. 24 and signaled the beginning of the 12-year Great Depression.

Nov. 6, 1929

Percentage change: -9.92

About the crash: Just a week after the height of the 1929 Stock Market Crash, investors saw another dip.

What were they saying back then?

We were wondering what parallels exist today, not only from an economic standpoint, but also from a human behavioural one. What were they saying back then that we could expect today?

We looked back at a Nightly News Broadcast of that time in order to gain a better understanding of the mindset of the time. You would be advised to watch the broadcast because in the words of philosopher George Santayana, “Those who cannot remember the past are condemned to repeat it.” (See The Nightly News Broadcast October 19, 1987 at the bottom of the post)

The 1987 crash lost much more than the crash of 1929, and although (as they said at the time), “Conditions today are much better than they were then.” According to the broadcast, the sudden sell orders stemmed from big institutional investors to private investors all worried about, “Inflation, rising rates, a declining dollar, and huge budget and trade deficits.”

Because consumption makes up a big chunk of the US GDP, they worried that the market plunge at the time could impact the psychology of even those that didn’t own stocks. They worried the consumer would stop borrowing and spending which could grind the economy to a halt. The difference is that today by comparison, consumers are much more heavily indebted. They are carrying mortgage debts, auto loan debts, student loan debts and credit card debts that are far higher than they were in 1987.

The Reagan administration at the time tried to blame congress for scaring big business by proposing higher taxes. There was also concern about needing to cut the deficit. However, one of the big criticism of the time where directed at Treasury Secretary James Baker for hinting that the US would not defend the decline of the US dollar.

Curiously absent from any of the stock market crash discussion of the time was the elephant in the room, the Federal Reserve Bank of the US. How times have changed, as they have now become the only voice that seems to matter anymore and the last line of defence. They have become the backstop for stock market for the past 20 years, gaining influence with every crisis. Only time will tell what happens when they lose their ability to keep everything a float.

All in all, it is a fascinating 9 minutes to watch. It should give you a pretty good idea of what to expect in the future.