Years before the stock market crash, the US and other countries decided to decrease the value of the US dollar in international currency markets so that the gap between US exports and imports would decrease; this helped lead to the stock market boom in the early 80s. Leading up to 1987, the Dow Jones Industrial Average tripled in value, however, when The Louvre Accord was established in which nations agreed to stabilize trade and stiffen the monetary policy to stop the depreciation of the dollar, stock prices fell and interest rates began to rise. Another possible cause of the crash was that The US House Committee on Ways and Means created a tax bill that reduced tax benefits correlated with leveraged buyouts and financing mergers.
Financial and technological innovations had major impacts on the stock market crash. As a result, program trading was monitored and circuit breaker rules were created which allowed exchanges to halt trading in the event that large price declines occur.
Sources:
https://en.wikipedia.org/wiki/Black_Monday_(1987)
https://www.investopedia.com/terms/s/stock-market-crash-1987.asp
Written by Ragan Krames, P4
I find it fascinating and worrying that the stock market can lose so much value in one day. This is very similar to what we are currently facing in the market, where stocks are losing value rapidly, leading to a recession. Usually, stock market crashes happen right after a giant increase in the value of the stocks, which goes over the tipping point and investors take their money out, resulting in a crash.
ReplyDeleteAlthough the stock market crash of Black Monday was somewhat severe, it did teach American investors a lesson on how to mitigate risks like this. The government realized that just using a circuit-breaker to halt trading wasn't really enough to fix the issue as it was just a short-term solution. Instead, the Federal Reserve realized that they really had to intervene and regulate trading to help the market achieve normalcy. Also, it taught a lesson to investors: diversify your portfolio. With the boom of the 1980s, many got into the stock market but many weren't smart about it since it appeared as if nothing bad could happen. However, the crash of 1987 helped many realize that even in a time of boom, things go wrong very quickly. This helped shift the public away from taking risky investments.
ReplyDeleteSource:
https://www.thestreet.com/politics/black-monday-1987-14738772