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Posted on 30 March 2011 | 11,386 views

Comparing the 1929 Crash to the 1987 Crash

The stock market crashed two times during the 20th century — once in October 1929 and almost 60 years later in October 1987.

October is sometimes described as the cruelest month for the American stock markets. That’s because the two great market crashes of the 20th century happened in October of 1929 and October of 1987.

Stock market crashes, or sudden collapses in the value of stocks which send the “Dow Jones Industrial Average” (DJIA) into a tailspin, are triggered by a variety of reasons including high stock prices, panic or inadequate controls on trading. Afraid of losing everything as prices begin to drop, investors will rush to sell, compounding the problem by driving the prices lower.

The dramatic loss of value that characterized both market crashes is illustrated in our graph, which index the weekly closing prices of the Dow Jones Industrial Average for 1929 and 1987. They use December 31 of 1928 and 1986 as the index point, or base, and show a parallel pattern of increasing prices and stunning drops — 12.8% in 1929 and 22.6% in 1987.

Using an index, which gives figures in relation to an agreed-upon base, instead of the actual Dow Jones Industrial Average — which closed of 230.07 in 1929 and 1738.34 in 1987 — makes it possible to compare the two events.

Which was the greater one-day loss in 1929 versus 1987?

October 29, 1929
% loss — 12.8%
$ loss — $14 Billion

October 19, 1987
% loss — 22.6%
$ loss — $500 Billion

Comparing the 1929 Crash to the 1987 Crash

In 1987, in part because of government regulations and trading limitations that had been put in place after 1929, the market recovered much more quickly and the long-term effect on the economy was modest in comparison to the worldwide depression of the 1930s.

In the wake of the 1987 stock market crash, efforts to prevent yet another “Stock Market Crash” led to restrictions on computer generated program trading and the introduction of shut-down mechanisms, called circuit breakers.

For example, trading on the New York Stock Exchange (NYSE) will be halted if the market, measured by the Dow Jones Industrial Average, drops 10%. But trading could resume, depending on the time of day the drop occurs. If the DJIA drops 20%, trading will end for a longer period or the market will close, depending on the time of day. And if it drops 30% it will end for the day. The actual number of points the Dow needs to drop is set four times a year (at the end of January, March, June, and September), based on the average value of the Dow in the last month of the quarter.

Circuit breakers have been set off only once, on October 27, 1997, when the Dow Jones Industrial Average fell 554 points, or 7.2%, and the trigger levels were lower. In fact, the DJIA has dropped as much as 10% only three days since 1915.

Using circuit breakers means a crash would almost certainly be drawn out over several days. Since investor panic makes any crash worse, slowing down the pace of the fall could help deter hasty sell decisions.

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