Black Monday and Its Aftershocks

No other day in the history of the S&P 500 comes close. Not the 1929 crash. Not the 2008 financial crisis. Not the COVID panic of 2020. On October 19, 1987, the index fell from 282.70 to 224.84 — a 20.47% decline that erased $500 billion in market capitalization in six hours. Of 754 stocks in our universe, 708 declined. The median stock fell 11.80%. Forty-six stocks — forty-six out of 754 — managed to close higher.

But Black Monday was not a bolt from the blue. The market had been deteriorating for weeks. And the aftershocks continued for months, producing five more -4% days through April 1988 and one final convulsion in October 1989. Together, these eight days tell the story of an era when new financial technologies — portfolio insurance, program trading, index arbitrage — collided with old-fashioned human panic to produce the most violent market destruction the modern world had seen.

September 11, 1986 — down 4.81%. A full thirteen months before Black Monday, the S&P 500 delivered a warning shot. The index fell 4.81% on a single Thursday as bond yields spiked and investors worried about the Tax Reform Act of 1986, which was reshaping capital gains taxation and corporate tax shelters. It was the worst single day since the Kennedy Slide of 1962 — and it came in the middle of a powerful bull market that had delivered 27.8% in 1985 and was on pace for another double-digit year.

In retrospect, September 11, 1986 was a dress rehearsal. The market recovered within two weeks. The bull market continued. And the lesson that investors drew from the episode — that sharp selloffs are buying opportunities — was exactly the lesson that would prove catastrophic thirteen months later.

The S&P 500 peaked at 336.77 on August 25, 1987, capping a spectacular bull run that had seen the index gain 44% in the preceding twelve months. By early October, a slow decline had taken hold. Rising interest rates, a growing trade deficit, and geopolitical tensions were weighing on sentiment. But nothing in the fundamental picture suggested catastrophe.

October 16, 1987 (Friday) — down 5.16%. The first of three consecutive crash-magnitude days. The market fell 5.16% on the last trading day of the week, spooked by news that the House Ways and Means Committee was proposing legislation to limit tax benefits on corporate takeovers. Program trading amplified the selling. Investors went into the weekend knowing that markets in Asia and Europe would open before New York on Monday morning.

October 19, 1987 (Monday) — down 20.47%. Asian and European markets had cratered overnight. When the New York Stock Exchange opened, selling was so overwhelming that many stocks simply did not trade for the first hour. The Dow Jones Industrial Average, which traders were watching more closely than the S&P, fell 508 points — a number so large that ticker tapes literally could not keep up. By midday, there were serious discussions about closing the exchange entirely.

The proximate cause was portfolio insurance — a strategy that used futures contracts to create a “floor” under equity portfolios. In theory, as the market fell, portfolio insurers would sell S&P 500 futures to hedge their exposure, which would in turn reduce the impact of further declines on their clients. In practice, the selling of futures drove down the futures price, which triggered more selling by portfolio insurers, which drove the price down further, in a self-reinforcing spiral that overwhelmed every buyer in the market.

The S&P 500 closed at 224.84. In the space of three trading days — Thursday through Monday — the index had fallen from 298.08 to 224.84, a cumulative decline of 24.6%. The market was still up for the year, but only barely.

Black Monday did not mark the bottom. The market bounced 5.3% on October 20 and another 9.1% on October 21, but then reversed course.

October 26, 1987 — down 8.28%. One week after Black Monday, the market crashed again. The S&P 500 fell from 248.22 to 227.67 as investors who had held through the initial crash decided they could not withstand another episode. This secondary crash was in some ways more damaging psychologically than Black Monday itself, because it shattered the hope that the worst was over.

November 30, 1987 — down 4.18%. Six weeks after Black Monday, the market was still bleeding. A month-end selloff dropped the index to 230.30, just five points above the Black Monday close. The S&P was now down 31.6% from its August peak.

January 8, 1988 — down 6.77%. The new year brought no relief. A bond market selloff and renewed fears about economic weakness sent the S&P down 6.77% — the worst day since Black Monday itself. But this would prove to be the last aftershock of true crash magnitude for three months.

April 14, 1988 — down 4.36%. A spring selloff provided one final echo of Black Monday. By this point, the market had been grinding sideways for six months, unable to mount a sustained recovery. The peak-to-trough decline from August 1987 to December 1987 was 33.5% — from 336.77 to 223.92.

And yet, despite all of this carnage, the S&P 500 finished 1987 up 0.26% for the year. The index that had opened January at 246.45 closed December at 247.08. An investor who went on vacation on January 1 and returned on December 31 would have noticed nothing at all.

October 13, 1989 — down 6.12%. Twenty-four months after Black Monday, the market had fully recovered and then some. The S&P 500 reached 359.80 on October 9, 1989 — 7% above its pre-crash peak. The bull market appeared firmly reestablished. Then, on Friday the 13th, the market fell 6.12% in a crash that had nothing to do with portfolio insurance and everything to do with the decade’s other great financial innovation: the leveraged buyout.

The trigger was the collapse of a $6.75 billion buyout of United Airlines’ parent company, UAL Corporation. When financing for the deal fell apart, it raised immediate questions about the viability of other pending LBOs and the mountain of junk bond debt that financed them. The selling cascaded through the market in minutes.

The “Friday the 13th mini-crash” was sharp but brief. Of 824 stocks tracked, 627 declined (76.1%), with a median return of -2.63%. The market recovered most of the loss within a week and finished 1989 up 28.4% — one of the best years of the decade. But the episode foreshadowed the junk bond crisis and savings-and-loan collapse that would define the early 1990s.

On October 19, 1987, there was essentially nowhere to hide. Of 754 stocks in our dataset, 708 declined — 93.9% of the entire universe. The median stock fell 11.80%, and the average fell 11.83%. But within the wreckage, some names suffered far more than others.

Microsoft, which had gone public just eighteen months earlier, lost 30.12% of its value in a single day. The stock was trading at roughly $0.19 (split-adjusted). An investor who held through the crash and through every subsequent crash in this series would see that $0.19 share become worth over $400 by 2025 — a return of more than 210,000%.