by Gary Alexander

October 19, 2021

I attended my first New Orleans Investment Conference in November 1981 as a free-lance reporter for DC-based Personal Finance and a New York financial publisher. Two years later, I was employed by the conference founder, James U. Blanchard III (through 1989), and I have been MC and/or panel moderator there ever since, so this marks my 40th anniversary there. Today is their opening day, as well as the 34th anniversary of “Black Monday,” the worst one-day crash (in percentage terms) in history, down 22.6%.

Since 1987, October has had a reputation of being the month of market crashes, although that has only been true in 1907, 1929, and 1987, with the 2008 crash centered in September. As Jason Bodner wrote last week, the Doomsday press play up our fears of October. Sure enough, a best-selling financial author said on September 29 that we will soon face “the biggest crash in world history,” and it won’t be just stocks. The whole financial “house of cards is coming down,” real estate along with stocks. He says you can only find safety in Gold, Silver, and Bitcoin. That will be sweet music to New Orleans attendees.

The problem is, this Doomsday author wrote a book predicting the same “biggest crash in history” in 2015, but that’s far from the record for delayed gratification. One regular New Orleans speaker has predicted a “Greater Depression” for the last 40 years, another for 35 years. In 1929, Roger Babson was credited with predicting that crash, but he had predicted that crash since 1925, missing a 150% gain. Some modern bears have missed the last doubling (since 2015), or the last 4,000% gains since 1981.

Don’t get me wrong, I still like gold, and I hold gold as a dollar hedge and alternative for most currencies and bonds, but I work with Louis Navellier because I believe even more in stocks, and Louis is one of the few stock-based advisors who also respects gold. (I’ll report from the scene in New Orleans next week.)

The Crash of 1987 in Slow Motion – 6 Days of Collapse and 2 Days of Recovery

Pardon the length, but I don’t think you’ll find this level of detail anywhere else, and it’s a dramatic tale:

Day 1: Wednesday, October 14, 1987, was the opening shot of the Crash of 1987. The Dow Jones index fell by a then-record 95.46 points (-3.8%), from 2508.16 to 2412.70. The Dow would set two larger all-time drops the following Friday and on Black Monday, but this was the starting gun. The Dow fell nearly 800 points (over 30%) in four days. What set off this worst four-day (and one-day) crash of all time?

Books have been written on this question, but the simple answer is that the Dow had risen too far, too fast, from 1895 on January 1, 1987, to 2722 on August 22, 1987 (+46.4% in under eight months). The market was overdue for a correction, but what turned a normal correction into a crash? For the first clues, The Nightly Business Report of October 14 gave this long litany of causes for that first big daily drop:

(1) The trade deficit was announced at $15.7 billion that day. This was the “proximate cause.”
(2) Bond prices were at their lowest levels of the year, down 13.4% since February 9, 1987.
(3) The U.S. dollar had dropped 11% since its August high.
(4) Argentina announced a devaluation of the peso and a price freeze against 135% inflation.
(5) Chemical Bank reported a third-quarter loss and raised its prime rate from 9.25% to 9.75%.
(6) Car sales were dramatically down for the first 10 days of October: GM sales were down 43%, Ford was down 36%, and Chrysler down 41%, compared to the previous 10-day period.
(7) A tax bill was reported out of the House Ways and Means Committee, which would have severely limited tax deductions for interest paid on debt used to finance takeover activity – a war on mergers!

After a shell-shocked half-hour of such dismal facts, NBR announced that their commentary for the next night would be by Dr. Arthur Laffer, on “The Financial Collapse on the Way.” But that would change…

Day 2: Thursday, October 15: Dr. Laffer thought better and changed his nightly PBS commentary to a more neutral topic: “Why public employees should not be able to strike.” Others tried more positive talk as well, but none of this helped. The Dow careened down another 67.61 points (-2.39%) to 2,355.09.

Day 3: Friday, October 16 opened on a positive note, with the Dow up nine points. By 1 pm, however, the Dow was down 31. By 2:00, it dropped another 54 points, then recovered 29 points from 2:00 to 3:00, but in the last half hour, the Dow dropped 50 more points, to close down a record 108.35 points (-4%), from 2355 to 2246, on record volume of 338,500,000 shares, while Gold was on the rise, reaching $471.

There was nervous tension in the air on The Nightly Business Report of October 16, 1987, as host Paul Kangas expressed the majority view: “Prices cascaded down due to heavy program trading and portfolio insurance selling.” NBR reporter Neil Cavuto said that the panic on Wall Street was mostly related to Salomon Brothers’ decision to lay off 800 employees – but most investors were waiting for the calm and re-assuring voice of Louis Rukeyser, the long-time host of “Wall $treet Week With Louis Rukeyser.”

Lou explained the week’s losses as if they were suspects in a crime thriller, ranging from “scary lay-offs at two major firms,” to “growing evidence that the mindless computer-driven program trading of institutions can turn worry into panic, and prudent selling into wholesale desertion.” But it was one of Rukeyser’s guest panelists, Martin Zweig, who became a prophetic voice on that dark and stormy night:

“I haven’t been looking for a bear market, per se. I have been really in my own mind looking for a crash, but I didn’t want to talk about it publicly because it’s like shouting fire in a crowded theater, and there’s other ways to play it. You just tilt your strategy negatively and you shut your mouth.”

Yes it was a dark and stormy night on Friday, October 16, 1987: A storm hit London, the worst in 300 years. TV reporters said, “The storm took everyone by surprise, rolling into the British capital from the English Channel and plunging the City of London into darkness and chaos just before dawn.” The storm was so bad that the Bank of England declared that Friday as a holiday. This was an eerie co-incidence:

On October 24, 1929, a storm also hit London while Winston Churchill was touring the New York Stock Exchange on Black Thursday, the first day of the 1929 Crash. But in 1987, the big 508-point drop on Black Monday would be caused by another kind of European thunderstorm – a “weekend war of words.”

Day 4: Saturday, October 17: Markets were thankfully closed, but U.S. Secretary of the Treasury James Baker III was in Europe and told the Germans to “either inflate your mark, or we’ll devalue the dollar.”  Later, an unnamed Treasury official said that America would “drive the dollar down” if necessary.

Baker’s reason for saying this was that the U.S. trade deficit figures were released on the previous Wednesday at record highs; the Prime Rate then shot up on Thursday, and the bond market got hit hard. On Friday, Treasury bond rates climbed over 10% and contributed to Friday’s record down market day.

Day 5: Sunday, October 18, Treasury Secretary Baker went on the Sunday morning TV talk shows, where he said the U.S. “would not accept” the recent German interest rate increase. He repeated his threat to drive the dollar down. Some said Baker’s rash words were the biggest cause of Black Monday’s panic.

  • Jacques Delors, president of the European Commission, compared Baker’s remarks to “a pyro-maniac fireman. When you’re living on the edge of the volcano, you don’t light matches.”
  • Economist Pierre Rinfret said, “I think we have a Secretary of the Treasury that started one of the worst panics in the history of the stock market. I think he is a fool. I think he should resign immediately or be fired.” After cooling down, he blamed Baker for “bombing his own currency.”
  • Trader Jimmy Rogers, after seeing Baker’s gaffe on TV, said, “I went in on Monday, ready to short the market, but there were no buyers. The crash had nothing to do with program trading or arbitrage or investment insurance. Greenspan and Baker simply panicked and blew it.”

Financial Panic Chart and Accompanying Headlines Image

Day 6: “Black Monday,” October 19 was entirely predictable, given what we have seen so far, but it didn’t happen all at once, and it didn’t start in New York. As always, the market day began in Asia, where Monday opened with a 33% drop in Singapore, a 17% loss in Tokyo, and 11% down in Hong Kong – which closed for the rest of the week. Europe fared no better, with a 22% drop in London, 14% in Zurich, and 13% in Frankfurt. Hearing this news over their breakfast coffee, New York traders were bearish from the start, as the Dow dropped 104 points in the first hour alone, while gold was up $10, to $481.70.

By the middle of the day, however, the New York market began to consolidate its losses, staying down between 100 and 200 Dow points, and brokers hoped for a single-digit percent loss. But after 2:00 p.m., the market began to lose 100 points each half hour, accelerating from a 376-point drop as of 3:30pm, to a 508 point drop at the closing bell. Most investors couldn’t get through to their brokers to sell. All circuits were busy, so concerned investors kept their eyes glued to the Financial News Network (FNN), where one bullish ad featured a “Professor Gerald Gold,” who predicted that the Dow would hit 2,987 by year’s end!

Day 7: Tuesday, October 20 was the scariest time of all. Despite Monday’s record 508-point loss, there was no buying at the opening. The Dow fell 100 points in early trading, but by the end of the day, it was up over 100 (+5.9%), the first-ever 100-point daily gain. The next day, that record was shattered with a +187-point day (+10.1%), the first 10% daily rise since 1933. Tuesday set a new volume record for the third straight day, at 608,120,000 shares. Much of the volume came from early panic selling, but at some mid-morning moment, everyone looked at each other and said, “Enough of this,” and started buying.

On the dark side, the Toronto gold stock market index fell 22% on October 20 – Gold’s Bloody Tuesday. On the previous day, Bloody Monday, gold rose. Nobody expected a gold stock crash the following day, but traders subject to margin calls on Monday or Tuesday morning sold anything that had held its value.

On that Tuesday, America was in the middle of a World Series (Minnesota vs. St. Louis). For the three mid-week games in St. Louis, Merrill Lynch pulled their regular TV ads and replaced them with a sober message that told baseball fans that, “Merrill Lynch is still ‘bullish on America.’”

Day 8: Wednesday October 21 was the largest one-day percentage gain since 1933, by a wide margin. Three of the four biggest daily gains of the late 20th Century came in one 10-day spurt in October 1987:

Tuesday October 20: +102.27 (+5.9%)
Wednesday October 21: +186.84 (+10.1%)
Thursday October 29: +91.51 (+5.0%)

Two Charts of the Dow Jones Industrial Average Image

To summarize, the main cause of the 1987 crash was that the market soared too far, too fast. At the end of September 1986, the Dow was 1767.58. On August 25, 1987, it peaked at 2722.42, up 54%. There is no justification for that large of a rise in under 11 months. As for the “proximate cause,” blunders by two political appointees caused the crash. First, the rookie chairman of the Federal Reserve, Alan Greenspan, made it his first order of business to raise the Discount Rate in early September 1987. That started the correction. Then, Secretary of the Treasury James Baker talked tough to the Germans about the dollar, pushing us into a crash. As in 1929, we must look to government first for the cause of the crash. Between Baker’s currency wars, Greenspan’s tight money, a new Congressional tax bill, and more threats of protectionist legislation, the problem was too much government intervention, not “computerized trading.”

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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