This week marks the 33rd anniversary of Black Monday, one of the most infamous trading days in market history. On October 19, 1987, the S&P 500 lost 20.4%, by far the largest single-day drop in US stocks ever. Three decades later, some of the effects can still be felt by investors.

Source: Wall Street Journal

The market had been on a tear for over five years, heading into the fall of 1987. That year alone, the S&P 500 had gained over 40% by its peak in August. Things would soon get ugly. In the four trading sessions between 10/14 and 10/19, the S&P 500 declined over 30%. For context, the head-spinning selloff we experienced at the beginning of this year took 22 days to reach -30%, an eternity in comparison. The 1987 crash was punctuated by the massive 20.4% in the S&P 500 on Monday the 19th. Previously the “Black Monday” moniker was reserved for the 12% loss on October 28, 1929, but this was no competition.

After such a dramatic move in the market, investors naturally wanted to understand what caused the crash. While the impetus for the 2020 selloff is obvious, it is much less so for the 1987 crash. The initial selling has been attributed to a variety of factors, but there is little consensus on how much any single factor contributed. Potential catalysts include:

  • High valuations – After a five-year bull market, stocks had become expensive. The trailing P/E ratio leading into the selloff was about 22, which is high based on historical standards(3).
  • Global trade concerns – A rising trade deficit and weakening US dollar were increasing worries of inflation.
  • Rising interest rates– Interest rates were increasing globally, and the inflation/weakening dollar worries stoked fears that US rates would continue to rise.
  • Regulation – Congress filed legislation that would eliminate tax benefits associated with financing mergers. The leveraged buy-out boom of the 1980s is considered to have contributed to the lofty valuations.
  • Geopolitical tensions(2) – Iran struck a US-owned tanker with a missile in the Persian Gulf on 10/16/87. The US responded by destroying two Iranian oil platforms on 10/19/87.

Although there is little agreement on what spurred the initial selling, it is commonly believed that there were a few factors that intensified the selloff. These include(1):

  • Mutual fund redemptions – Some mutual fund companies became forced sellers after receiving large redemption orders on that Friday and over the weekend.
  • Margin calls – A record number of margin calls and an issue with the timing of payments forced liquidations and added to selling pressure.
  • Portfolio insurance – A strategy popularized in the 1980s that attempted to participate in upside market moves, but limit the downside. Portfolio insurance protected by selling at pre-determined levels during a market decline. A serious problem arose because there was so much money tied to these strategies. They all essentially sold at the same time and pushed prices below subsequent sell triggers, which precipitated the need for more selling (and so on).
  • Index Arbitrageurs – For a variety of reasons (including some mentioned above), the stock futures market was trading below the cash stock market. Arbitrageurs tried to take advantage of this price discrepancy by selling stocks and buying futures, which added to the selling pressure on stocks.

Ultimately, it would take nearly two years for the S&P 500 to return to its August 1987 peak. Thirty-three years later, the impact of Black Monday can still be felt by investors. One notable adjustment was the introduction of “market-wide circuit breakers,” which are designed to temporarily halt market trading if losses exceed pre-determined levels. The specific rules guiding the circuit breakers have been revised a few times over the years, but the current rule can be summarized as:

  • Level 1 – Losses on S&P 500 of more than 7%: trading halts for 15 minutes
  • Level 2 – Losses on S&P 500 of more than 13%: trading halts for 15 minutes
  • Level 3 – Losses on S&P 500 of more than 20%: trading halts for the remainder of the day

On several days during March of this year, the market-wide circuit breakers halted trading temporarily. A level 2 or 3 halt has never occurred, but it should theoretically prevent a single-day market loss ever exceeding what we saw in 1987.

Another legacy of Black Monday has likely been more impactful for many investors. A report on the market crash published by the SEC specifically called for the creation of a product that would allow for trading a large basket of stocks at once. The report argued that such a device could have alleviated some of the selling pressure on individual stocks during the crash. A partnership of three firms: Standard & Poor’s, the American Stock Exchange, and State Street Global Advisors successfully ran with this idea. In 1993 they launched the Standard & Poor’s Depository Receipts (SPDRs), nicknamed “spiders.” Today you probably know this product by its ticker: “SPY,” the first exchange-traded fund (ETF) in the US. The ETF industry has since exploded to over $7 trillion in assets and has revolutionized the way millions of people invest.



1. Mark A. Carlson, 2006. “A brief history of the 1987 stock market crash with a discussion of the Federal Reserve response,” Finance and Economics Discussion Series 2007-13, Board of Governors of the Federal Reserve System (U.S.), revised 2006.

2. Pyle, Richard. “U.S. Attacks Iranian Oil Platforms in Persian Gulf.” AP NEWS, Associated Press, 19 Oct. 1987,

3. Bary, Andrew. “Black Monday.” Barron’s, Barrons, 15 Oct. 2007,


  • Economic data from Beijing showed that the Chinese economy saw GDP growth of 4.9% YoY in the third quarter. This follows a 3.2% YoY increase of GDP in the second quarter and a 6.8% contraction during the first. As the epicenter of the pandemic, China locked down and subsequently reopened its economy earlier than western countries. The International Monetary Fund (IMF) is forecasting China as the only major economy that will grow in 2020.
  • Approximately 10% of the S&P 500 has reported Q3 earnings so far. If you blend the realized earnings for those companies that have reported with the expected earnings for those that have yet to report, the Q3 YoY earnings growth rate is at -18.4% (according to Factset). This rate compares to the initial expected YoY growth rate of -21.0%. With the trailing P/E ratio for the S&P 500 currently at an elevated 25.9, the market needs earnings to return to growth to justify continued gains.
  • Other notable economic data releases to be published this week include jobless claims and the Index of Leading Economic Indicators (LEI) on Thursday, as well as an advanced look at manufacturing and services sector activity for October (flash PMIs) on Friday.



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Source: Morningstar Direct.

Source: Morningstar Direct.



Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)


Source: MarketWatch

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Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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