The first modern global financial crisis, Black Monday, occurred in the autumn of 1987, when the Dow Jones plummeted 22.6% in a single day – the largest single-day drop in history. This event exposed the interconnectedness of global financial markets and led to significant reforms, including trading halts during rapid sell-offs, and the US Federal Reserve's strategic use of liquidity to manage crises.
Reasons for the 1987 crash
Today's market events evoke memories of that historic crash, creating panic across global markets, even if the scale is different. The key questions now are: how long will the current situation last, and could there be a crash like Black Monday again?
The stock market soared ahead of the 1987 crash, with the Dow Jones and Nasdaq 100 rising by 44%, fuelling fears of an asset bubble. Negative news in mid-October 1987, including a larger-than-expected US trade deficit and a weaker dollar, shook investor confidence. The situation worsened with daily losses from 14 October, peaking on 16 October due to the "triple witching" event, when options and futures contracts expired simultaneously.
Similar psychology and triggers
The crisis exposed the psychological and technological interconnectedness of the markets. Investors saw global panic spread rapidly, highlighting the interdependence of these markets. Back then, the dollar was the trigger; today, it’s the yen's sudden appreciation, with the crash spreading from Japan to Europe and the Nasdaq, affecting assets like bitcoin, silver, and gold.
For months, markets have been cautious about economic data while the AI hype dominated. Bad economic news was good for stock and bond investors. Inflation fell, weakening the economy, but not alarmingly so, and Wall Street largely believed in a soft landing. Inflation nearing the Fed's 2% target and a stabilising labour market pushed bond prices up and stock indices to record highs.
US jobs data sparks recession fears
However, stock markets can change quickly, and Friday’s US labour market data for June probably disappointed both the Fed and investors. Non-farm payrolls increased by only 114,000, well below expectations of 175,000, and the unemployment rate rose to 4.3%, defying predictions that it would remain at 4.1%. This suggests the economy is slowing and a recession might be approaching.
This weak jobs report followed a poor manufacturing report and other data indicating slowing consumer and housing activity. After being criticised for raising rates too late in 2021, markets are concerned that the Fed is too slow to respond to signs of an economic slowdown, and that its monetary policy is behind the times. With the US election less than three months away, the Fed's task is becoming more challenging.
1987 vs 2024
In 1987, the market recovered quickly, with the Dow Jones regaining 57% of its losses in two days and reaching pre-crash highs within two years, never retesting its lows after the crash. The Fed's actions then boosted investor confidence in its ability to manage serious downturns. While the current situation isn't as bad as in 1987, the last few years suggest the Fed could be ready to act if needed.
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