What is the 'Stock Market Crash Of 1987'

The stock market crash of 1987 was a rapid and severe downturn in stock prices that occurred over several days in late October 1987, affecting stock markets around the globe.

BREAKING DOWN 'Stock Market Crash Of 1987'

After five days of intensifying stock market declines, selling pressure hit a peak on October 19, known as Black Monday. The Dow Jones Industrial Average (DJIA) fell a record 22% on that day alone, with many stocks halted during the day as order imbalances prevented true price discovery. Thanks to support from the Fed and exchange lockouts, the selloff halted the next day and the market recovered most of its losses rather quickly. While speculation remains as to the exact causes of the crash, many people point to the lack of trading curbs, which markets have today, and automatic trading programs in place at the time as possible culprits.

The lead-up to October 1987 saw the DJIA more than triple in five years. As a result, valuations rose to excessive levels, with the overall market's price to earnings ratio climbing above 20, implying very bullish sentiment. And while the crash began as a U.S. phenomenon, it quickly affected stock markets around the globe; 19 of the 20 largest markets in the world saw stock market declines of 20% or more.

Investors and regulators learned a lot from the 1987 crash, specifically with regards to the dangers of automatic or program trading. In these types of programs, human decision-making is taken out of the equation, and buy or sell orders are generated automatically based on the price levels of benchmark indexes or specific stocks. After the crash, exchanges implemented circuit breaker rules and other precautions to slow down the impact of trading irregularities in hopes that markets will have more time to correct similar problems in the future.

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