Wednesday 19 October 2022 marks 35 years since stock markets experienced the chaos now known as Black Monday.
The fateful day back in 1987 saw the Dow Jones Industrial Average index crash by 22.6% and the S&P 500 fall by 20.4% in a single day, marking the start of a new global stock market correction.
The scale of these one-day falls has not been repeated since, despite three standout periods which investors might have expected to cause equal or worse damage.
HOW DOES IT COMPARE TO OTHER MARKET CORRECTIONS?
For the Dow Jones, the closest it has come to matching Black Monday's 22.6% one-day slump is 16 March 2020 when the index fell 12.9% as the Covid pandemic started to take its grip around the world. It's an identical story with the S&P 500, falling 12% on the same day.
The global financial crisis, also known as the credit crunch, caused widespread damage to consumer and business life in 2008. However, the pain was spread over many days and months rather than a sudden shock to the market.
Three of the top 10 biggest one-day declines for the Dow Jones since (and including) Black Monday in 1987 related to the global financial crisis, the largest single-session being a 7.9% decline on 15 October 2008.
At the current rate, 2022 will go down in history as one of the worst years for the stock market, riled by persistently high inflation, a rapid increase in interest rates and war.
The scores on the doors include a near-18% decline in the Dow Jones year-to-date. It's been a steady trickle down rather than a short sharp shock, which explains why you must scroll way down the list of the worst one-day market declines to find an entry from 2022.
In 53rd position is the 3.9% single session drop on the Dow Jones which happened on 13 September this year.
WHAT CAUSED BLACK MONDAY?
The Dow Jones had just come off a five-year rally which saw the index appreciate by 229% in value between August 1982 and August 1987. Greed then turned to fear as US economic growth started to slow and high trade deficit figures were recorded in the country. After such a fortuitous period on the markets, investors became spooked and rushed to sell their shares.
The surge in sell orders put pressure on exchange systems and created a panic. This was in the early days of computer trading whereby automated stop losses triggered further selling after stocks dropped by a large amount, exacerbating the problem.
Black Monday led to the advent of circuit breakers which temporarily halt trading if major indices fall by a certain amount.
THE MARKET SELL-OFF SOUNDS QUITE A BIT LIKE 2022
The difference between Black Monday and 2022 is that we haven't had investors all rush for the exit at the same time this year. While there has been a lot of selling of stocks, bonds, cryptocurrencies and other asset classes, there has not been the air of panic which engulfed markets back in 1987.
Nonetheless, some of the catalysts behind both Black Monday and this year's market behaviour are very similar. The prospect of an economic slowdown can translate into a hit for corporate earnings and reduced spending by consumers and businesses, which in turn dampens investor appetite for the markets.
