Brokers remember the day Wall Street fell into the abyss

NEW YORK: Thirty years ago, before heading to work at the New York Stock Exchange (NYSE), Peter Kenny left his home in lower Manhattan and made a detour to the nearby Our Lady of Victory church to pray to St Jude, the Roman Catholic patron saint of desperate and lost causes.

The reason was the stock market crash known as “Black Monday” on October 19 1987.

Kenny was stunned by the events that unfolded the previous day, the worst trading day in United States history.

“I don’t think anyone was prepared for what actually transpired in the overseas markets, which led to the bloodbath on Monday,” said Kenny, now senior market strategist at Global Markets Advisory Group.

When it was over, the Dow Jones Industrial Average (DJIA) had lost 22.6 per cent in one day, equivalent to a drop of about 5,200 points in the index.

The benchmark S&P 500 index plunged 20.5 per cent on Black Monday, equal to a drop of over 520 points today, and the Nasdaq dropped 11.4 per cent, comparable to a drop of about 750 points.

In 1987, US stock prices had climbed steadily all year, as they have this year, with each of the three major US indexes hitting record highs in late August. But September turned into a difficult month, with each index falling more than two per cent, though not by enough to raise alarm bells among investors.

But as the calendar flipped to October, the selling in US equity markets intensified. The DJIA and S&P 500 fell more than nine per cent in the week before Black Monday.

On the morning of October 19 1987, Art Hogan, then a floor broker at the Boston Stock Exchange, expected a possible rebound for stock prices.

Nothing had prepared him for what was to unfold.

“It was clear in that first hour... this was going to be as bad as we’ve seen in our lifetimes,” said Hogan, now chief market strategist at Wunderlich Securities.

Many describe the events of Black Monday as the first instance of computer trading gone haywire, caused by the use of portfolio insurance.

Portfolio insurance, the short selling of stock index futures to protect against a decline in value, caused computerised program trading to issue sell orders as a safeguard against more losses. Instead, losses intensified, causing even more sell orders in a feedback loop.

Of the 30 companies whose stocks are in the Dow today, slightly less than half were in the index at the time. American Express lost 26.2 per cent on Black Monday, Procter & Gamble plunged 27.8 per cent, and ExxonMobil tumbled 23.4 per cent. Reuters