Black Monday
Black Monday was an incident in the global market happened on the 19th of October 1987, which core event was a significant market decline triggered by the fall of the Dow Jones Industrial Average by more than 20% during one day. It provoked mass panic and herd behavior, led to more selling away and even more massive price drops, which, in its turn, spurred fears of an overall economic collapse. All of those circumstances resulted in making Black Monday one of the most memorable, though ill-famed, days in financial history.
Black Monday background
Although no single event was attributed as the main cause of Black Monday, it’s possible to determine several conditions which were combined and thus created a situation with a high possibility of such a huge stock market crash.
Firstly, it’s possible to divide those conditions into external and internal for the US stock market:
- Concerning external conditions, such occasions as upcoming tax policy changes, geopolitical confrontations, growing deficit in various spheres, decreasing of dollar value and rising rates of interest are often considered to be among the main reasons of Black Monday happening.
- Concerning internal market causes, general pessimism accompanied by expectations of prices to go down had already been present among investors before the first signals of a severe decline were noticed. Stock prices had long been considered to be exaggerated, and such a sentiment was combined with an additional and unexpected feature. By this time, automatic trading had already been implemented by some companies, and those programs’ activity created imbalance between selling and purchasing pressure, which, combined with the rest of internal and external factors, resulted in a cascade of price decrease, panic selling and a massive market crash.
Black Monday consequences
As a result of such a dramatic decline, many investors and financial organizations around the globe incurred huge losses, roughly estimated as being of more than $1.5 trillion. An overall impact on economies was different depending on a country’s monetary policy, and in some cases governments managed to avoid serious negative effects of this event on their citizens.
Still, Black Monday had a huge influence on the world of finance, trading and investing. Among some main measures taken by the US government, several regulative strategies and restrictions were designed and implemented in the stock market. Circuit-breakers and trading curbs are the most common and well-known instruments which were introduced after Black Monday.
Nevertheless, one of the most important issues arisen after Black Monday hasn’t been answered since then, and this issue is the market volatility, triggered by program trading and automate selling and purchasing.
Black Monday implications for further investing
Although Black Monday was clearly a devastating and painful event for many market participants, it’s possible to be used as a lesson and food for thought. Firstly, it’s highly important to remember that every market crash, even such a serious and large one as Black Monday, is finite, and there is always a recovery after that. So, it’s crucial to have a long-term plan for your investment portfolio, and it’s necessary to stick to that plan and continue pursuing goals set before a crash.
A plan, or a strategy, should be well-thought and wisely drawn up, including diversification of a portfolio, hedging practices and long positions. Following a sound investing strategy might prevent an investor from making panic moves. Panicking can often lead to unnecessary actions and subsequent huge losses, so it’s also recommended to avoid being absorbed by the media representation of the event to stay calm.
Another piece of advice on how to get prepared for unexpected events like Black Monday is creating shopping lists of assets for future purchasing. All in all, even a crash might be used as an opportunity, and such a list may turn pout to be handy when the prices go down, and the assets previously unavailable become more affordable.
