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Posted on 2 September 2011 | 3,649 views

Remembering the Stock Market Crash of October ’87

Remember the stock market crash of ’87? Stocks had been rising for five years and then came “Black Monday” when the Dow lost 508 points in a single day. By the end of October 1987, the Dow had lost nearly a quarter of its value.

Indeed, the Dow had been up 18.5 percent for the year the day before the crash and at its late-August peak had risen a staggering 43.6 percent for the year. John Phelan, chairman of the New York Stock Exchange at the time, recalled, “The market was just too high and it was looking for some excuse to react.”

The October 19 drop occurred when Wall Street faced many of the same conditions it faces today. The late summer months of 1987 saw stocks charging to fresh highs as well as an anemic dollar, rising oil prices, a weak housing sector and credit-market jitters — same conditions that exist today.

Sentiment was frothy going into the crash of ’87 — the price of stocks relative to the earnings of companies — a widely followed market measure known as the price-to-earnings ratio — was much higher and interest rates were also rising at the time.

The looks on people’s faces on October 19, 1987 actually told the story — it became a very sort of frantic environment on the floor of the NYSE where buyers simply disappeared in the final hours of the session.

After the stock market crash, a group of 30 prominent economists got together and made fools of themselves — they announced that “the next few years could be the most troubling since the ’30s.” Naturally, faint-hearted investors got out of the stock market, fearful that another Great Depression or maybe a repeat of a ’70s-style recession was coming.

When the crash was over, the Dow stood at only 1,738 and investors who had bought stocks 5 years previously were still up 70%. The bull market had scarcely even begun and instead of going down, stocks rallied and never looked back. The Dow rose to over 11,000 in January 2000, the most spectacular stock market success story in history.

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