Anniversary of the Great Crash of 1987

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Do you remember where you were on October 19, 1987--a day that made some people feel like they were living through a modern 1929?

The Dow Jones Industrial Average plunged 23 percent on that day. If that were to happen now, it would mean roughly a 3,000 point loss in a single day. Much of the commentary about the anniversary is either of the nostalgic sort or the "cautionary" sort.

The latter generally tries to get across the idea that such a plunge could happen again. But could it? In the aftermath of the October crash, circuit breakers were set up, but those market-wide circuit breakers have been triggered only once. That was in 1997. Still, in the wake of the Flash Crash of May 2010, the SEC decided to tinker with the circuit breakers, which were not triggered by the Flash Crash.

In June of this year, the SEC reduced the market decline percentage thresholds needed to trigger a circuit breaker to 7, 13, and 20 percent from the prior day's closing price, rather than declines of 10, 20, or 30 percent. It also shortened the duration of trading halts that do not close the market to 15 minutes, from 30, 60, or 120 minutes.

It is doubtful that we could get a 23 percent decline in one day, but it's more than conceivable that selling pressure will build if the markets were shut down for the day, and we could certainly see some massive drops in very short period of time, like one Flash Crash after another. Some think that more pyrotechnics might combine the elements of the 1987 crash with the May 2010 Flash Crash are all but inevitable. Some think the Flash Crash measures have no chance.

So maybe this is the year we see the "Big One". What do you think? -Jim

 

Jess