On the 30th anniversary of the 1987 stock market crash, U.S. stocks are at a record high and investors are concerned that steep valuations may mean a correction is overdue, despite healthy corporate earnings and economic growth.
But could a repeat of “Black Monday” happen today? Modern trading technology, changes to the way stock exchanges operate and in the way investor funds are managed should make a repeat of the 1987 crash unlikely. Yet cautious traders refuse to rule it out.
“We have learned a lot from the mistakes of the past in terms of the reaction or overreaction,” said Ken Polcari, director of the NYSE floor division at O‘Neil Securities in New York.
On Monday, Oct. 19, 1987, following large declines on Asian and European markets the previous week, the Dow Jones Industrial. DJI Average plunged 508 points, or 22.6 percent, for the biggest-ever single day decline in percentage terms by the blue-chip benchmark.
A decline of up to 20 percent in one day is possible today, but it would likely be a more orderly process, said Art Hogan, chief market strategist at Wunderlich Securities in New York.
“We have the ability to shut things down for a period of time and reassess and try to ascertain what is the best way to get back in business and take a calmer look at things,” he said.
In response to the 1987 crash, the U.S. Securities and Exchange Commission mandated the creation of market-wide “circuit breakers” that call a temporary halt to trading after the Dow declines 10, 20 and 30 percent. Only one market-wide halt has been triggered since then, in 1997.
The circuit breakers were adjusted in 2012, lowering the thresholds needed to trigger a trading pause, with the Dow replaced by the S&P 500 stock index. SPX as the benchmark index.
Under current rules, if the broader S&P 500 index falls more than 7.0 percent before 3:25 p.m. New York time, trading is paused for 15 minutes. If the decline continues once trading resumes, and it is still before 3:25 p.m., the market is again paused at 13 percent. If the decline happens after 3:25 p.m, trading continues. But if the decline reaches 20 percent, trading is suspended for the session, regardless of the time of day.