Overview of the "Black Monday" Stock Market Crash in 1987

The term "Black Monday" refers to the devastating stock market crash that occurred on October 19, 1987. On that day, the US stock market experienced an unprecedented plunge, with the iconic Dow Jones Industrial Average (DJIA) plummeting by 22% within a single day. This dramatic drop left a lasting impression on modern financial history and marked a major turning point for the American stock market.


In the week preceding "Black Monday," the stock market had already shown signs of weakness, experiencing two significant downturns that signaled extreme tension and instability in market sentiment. On the fateful day, panic selling escalated, causing trading volume to surge beyond what computer systems could efficiently process. This resulted in a backlog of buy and sell orders, halting trade progression and instantly straining liquidity.


The collapse quickly spread to futures and options markets, inflicting heavy damage on global financial markets. By the end of that month, most major stock indices worldwide had suffered losses ranging from 20% to 30%, making "Black Monday" a genuine global financial crisis. To this day, the phrase has transcended its historical context, becoming synonymous with massive and rapid stock market crashes.

The Multipronged Causes of the 1987 "Black Monday" Stock Market Crash 

When delving into the underlying reasons behind the 1987 "Black Monday" stock market crash, we find that this financial storm was not triggered by a single event but rather the result of multiple complex factors intertwining and acting together. Although no significant global news events occurred at the time, fear and uncertainty in the market were quietly brewing.


Firstly, the introduction and widespread adoption of computerized trading systems had a profound impact on market stability. Entering the 1980s, trading methods underwent a revolutionary change, with bustling exchange halls gradually replaced by efficient electronic trading platforms. This transformation greatly increased transaction speed, with systems capable of processing thousands of buy and sell orders within seconds. However, it also introduced new risks - the possibility of sharp price fluctuations within a short period increased dramatically.特别是在算法交易机器人 began participating in market operations, billions of dollars could be transferred within seconds when unexpected news emerged, exacerbating market instability.


Furthermore, the US trade deficit issue, tense international relations, and other political environmental factors also constituted important backgrounds to the collapse. Notably, the media's role in this process should not be underestimated. With the development of information dissemination technology, the reach of media reports expanded significantly, amplifying the effect of sensitive market information and further increasing market volatility and psychological pressure on investors.


However, beneath these external factors lie deeper reasons rooted in the psychological aspect of the market. Expectations and behavior patterns of decision-makers and ordinary traders played a crucial role when facing uncertainty. General public panic often led to large-scale panic selling, accelerating the stock market's collapse. Therefore, understanding the causes of "Black Monday" not only requires analyzing changes in objective conditions but also exploring the human nature and market psychology reactions under extreme circumstances.

Title: The Implementation, Function, and Controversies of Circuit Breakers

Following the "Black Monday" stock market crash, the US Securities and Exchange Commission (SEC) introduced a series of regulatory measures to prevent such catastrophic events from recurring. Among these measures, circuit breakers have gained widespread recognition and implementation in global financial markets, with specific applications in the American market.


At the core of circuit breakers is the idea of halting trading when there is a significant price fluctuation, providing the market with a cooling-off period to prevent panic from spreading further. For the S&P 500 index in the United States, a level one circuit breaker will be triggered if the decline reaches 7% within a single trading day, resulting in a 15-minute trading halt. If the drop extends to 13%, a level two circuit breaker comes into play, again suspending trading for 15 minutes. Should the unfortunate event of a 20% fall occur, a level three circuit breaker will be enacted, ending trading for the day prematurely.


However, the effectiveness of circuit breakers remains a subject of debate. Advocates argue that they can temporarily halt trading at crucial moments, slowing down the pace of market downturns and granting investors and regulators time to assess the situation and make decisions. This helps prevent the market from descending into disorder. Critics, on the other hand, point out that predefined circuit breaker thresholds might exacerbate panic in the market. As investors approach these well-known levels of decline, they may rush to sell, causing liquidity to plummet and potentially increasing price volatility.


Furthermore, circuit breakers in practice can indeed lead to issues of liquidity depletion. At critical price points, due to the expectation of triggering a circuit breaker, the volume of buy and sell orders decreases, making it difficult for the market to effectively absorb pressure from supply and demand imbalances. In such cases, allowing the market to continue natural trading might better facilitate self-correction.

Strategies and Mindsets for Navigating Market Crashes

When facing a potential "Black Monday" style market crash in the stock market or other financial markets, investors need to take a series of rational and practical measures:


1. Stick to Your Investment Plan and Trading Strategy: In the face of sudden market turmoil, the first priority is to stay calm and adhere to your predetermined investment plan and trading strategy. Panicked selling often has the opposite effect, while long-term, stable investment logic can help investors weather short-term market volatility.


2. Set Reasonable Stop-Loss Points: For both short-term traders and long-term investors, setting stop-loss limits is a critical aspect of risk management. While long-term investors typically focus on an asset's long-term growth rather than short-term fluctuations, in extreme cases, pre-setting downside protection for your investment portfolio can effectively limit potential losses and ensure capital safety.


3. Recognize Market Cycles and Be Patient for Recovery: Historical experience shows that even global market crashes eventually give way to turning points and recovery phases in the economic cycle. Even if the recession period may last for years, the global economy remains on a long-term growth trajectory. Therefore, after the market bottoms out, investors should have enough patience to wait for the market to recover and seize suitable opportunities to make adjustments or reposition their portfolios.


However, when it comes to emerging, high-risk markets such as cryptocurrencies, these principles must be flexibly applied based on specific circumstances. Due to the unique nature of blockchain technology and the cryptocurrency industry, some crypto assets may not fully regain their strength after a market crash and could even face permanent loss risks. Therefore, investment decisions in such markets should be made with extra caution, thoroughly assessing the risk-to-reward ratio, and adjusting risk management strategies accordingly.

"Black Monday" Chain Reaction Across Global Markets

The impact of "Black Monday" extended far beyond the United States, revealing significant and profound interconnections within the global financial market. When the U.S. stock market crashed in 1987, it swiftly affected markets worldwide, with Europe, Asia, and emerging markets experiencing severe shocks. This phenomenon highlighted an essential principle of finance: high interconnectedness within a globally integrated financial market.


On that fateful day, the FTSE 100 index in London plunged by over 10%, followed by a nearly 15% nosedive in Tokyo's Nikkei 225 index the next day. Numerous other stock markets across Australia, Hong Kong, and elsewhere also experienced substantial declines. These global reverberations manifested not only as immediate price correlations but also triggered changes in international capital flows, intensifying investors' risk-averse sentiment toward risk assets. As a result, global funds shifted their preference towards safer and more liquid investment products.


Furthermore, in the aftermath of the "Black Monday" event, governments and regulatory agencies worldwide deeply recognized the importance of strengthening international cooperation and coordination to jointly address potential risk factors that could trigger a global financial crisis. Simultaneously, this episode accelerated efforts among nations to reform and enhance financial market regulations, such as tightening surveillance on cross-border capital flows, establishing more effective early warning systems for crises, and promoting the adoption and development of risk control tools like circuit breakers on a global scale.

Other "Black Mondays" in History

Apart from the iconic event of 1987, there have been multiple unforgettable "Black Mondays" throughout history that have had a profound impact on the global economy.


1. The Great Stock Market Crash of 1929: On October 28, 1929, the American stock market experienced an unprecedented disaster. Known as "Black Tuesday," this stock market crash not only marked the beginning of the Great Depression in the 1930s but also led to long-term economic stagnation worldwide, with destructive power unparalleled in modern financial history.


2. The Stock Market Plunge Triggered by the 2008 Financial Crisis: On September 29, 2008, as the U.S. housing bubble burst, the stock market suffered severe damage, kickstarting a global financial crisis. The crisis lasted for years and affected economies worldwide, leading to numerous discussions and actions about financial regulation reform and economic policy adjustments.


3. Two Stock Market Crashes Amid the COVID-19 Pandemic: In early 2020, the rapid spread of the COVID-19 pandemic globally, combined with factors such as the oil price war, led to extreme turbulence in financial markets. On March 9, the U.S. stock market recorded its largest single-day drop since the Great Depression. However, just one week later on March 16, market panic intensified, causing another significant plunge in the stock market. This time, the decline exceeded the previous week's record. These two stock market crashes highlighted the massive impact of public health crises on financial markets and the vulnerability of the global economic system in the face of sudden disasters.

Conclusion

Looking back at the historical event of the "Black Monday" stock market crash in 1987, what we see is not just a catastrophe in the financial market, but also a starting point for profound reflection on the structure, regulatory mechanisms, and investor behavior in global financial markets. This disaster exposed the crucial role of factors such as market interconnectedness, risks associated with computerized trading, and market psychology in financial crises, and gave birth to the application of circuit breakers and other risk management tools.


However, even with these improvements, future financial markets will still need to continuously innovate and improve their regulatory systems to adapt to changing technological environments and the trend of globalization of the global economy. Looking ahead, understanding and drawing wisdom from the lessons of "Black Monday" is of significant importance for preventing potential financial crises and maintaining stability in financial markets.