Today marks the 20-year anniversary of Black Monday, when the Dow Jones Industrial Average plummeted more than 500 points, about 22%, and caused massive panic in the markets. The event has double meaning to the Futures industry because not only did it affect traders involved in the relatively new S&P 500 index futures market, but there was an attempt to scapegoat those markets after the market turmoil; and if it weren’t for Federal Reserve Bank Chairman Alan Greenspan’s knowledge and the cool head, those attempts may have succeeded in undermining or destroying that contract.
It is a lesson that should be learned, because despite what we know about market cycles and bubbles, with every major market downturn and despite signs and warnings, there are those who prefer to find a scapegoat, whether it is derivatives, hedge funds or some other boogey man.
There have been many retrospectives on the crash and the question always falls to: can it happen again? Our knowledge of markets and cycles provides an easy answer: Yes, that is the nature of markets. Of course, the more pressing question is: will it happen today? Or soon?
A panel of experts at a Chicago Board Options Exchange (CBOE) last week noted several similarities between today’s equity markets and those of 20 years ago. Then, as now, we were in the seventh year of a Republican administration that was running a significant budget deficit, the trade deficit was high, the U.S. dollar was plummeting and market volatility was increasing.
A major difference, noted in a news conference on the crash sponsored by Zero Alpha, is that measures have been implemented to stop trading if certain triggers are hit. “Now there are trading restrictions in place to prevent computer analytics from driving the price down automatically,” a Zero Alpha representative said.
In the Black Monday crash of 1987, a lot of blame was placed on computer generated index arbitrage trading signals, and while the “cascading effect” has been noted, it does not address the underlying weakness that caused it. The market opened lower the following day and several markets were closed. Trading at the New York Stock Exchange was halted, the CBOE halted trading at 11:45 (CST) and the CME halted trading about a half-hour after that.
Analysts at the CBOE event agreed that the following Tuesday was even more scary. After several markets closed, the Chicago Board of Trade’s Major Market Index was the only equity market that remained open for the entire day, there was an announcement of major corporate buybacks and the market was able to turn and ended the day up 100 points. Another important point to make is that, while many fortunes were lost that day, some traders, specifically highly disciplined systems traders, where able to capitalize on the circumstances. Then, as now, risk management principles are the key to surviving through the bad times.
