Today marks 30 years since the stock market crash of 1987. While U.S. stocks are at record highs, investors are still apprehensive that steep valuations may bring on a correction regardless of solid corporate earnings and economic growth.
Will we see another “Black Monday” today? Updated technology, changes in stock exchange operations and investor funds would lead to a repeat of the 1987 crash doubtful. Yet cautious traders refuse to rule it out.
On Monday Oct. 19, 1987, after sizable declines on Asian and European markets the week before, the Dow Jones Industrial Average dropped 508 points, or 22.6 percent, the greatest single day decline in percentage ever.
A decline of up to 20 percent in one day remains possible, but a more organized process, said Art Hogan, a chief market strategist. “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.
The U.S. Securities and Exchange Commission mandated the formation of market-wide “circuit breakers” after the 1987 crash. The “circuit breakers” put a temporary pause to trading if the Dow declines 10, 20 and 30 percent. In 2012, the breakers were adjusted to lower thresholds needed to bring on a halt, when the Dow was replaced by the S&P 500 stock index as the benchmark index.
Right now, if the S&P 500 index drops over 7.0 percent before 3:25 p.m. EST, trading is then paused for 15 minutes. When trading is resumed and the decline resumes, and it is still before 3:25 p.m., the market will pause again at 13 percent. If a decline happens after 3:25 p.m, trading endures. If the decline hits 20 percent, trading is halted for the day, regardless of the time.
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The current procedures were put into action after the May 2010 “flash crash,” when the Dow Jones Industrial Average plummeted almost 1,000 points or 9.0 percent, in minutes and then rebounded. In 2012, the SEC approved the regulation “Limit-Up Limit-Down,” which stops stocks from trading outside of a specific range based on recent prices, pausing trading in the stocks in question when prices run afoul of the bands.
Adjustments needed to be made again to the bans and the re-opening procedures for paused stocks after a chaotic trading session in August 2015. Worries over the stability of the Chinese economy led to people panic-selling and a shortage of buyers, which brought forth a record intra-day drop in the Dow. Over 1,250 trading halts in 455 individual stocks and exchange-traded funds created confusion that could have created the issue.
The precautions in place to avert another 1987- style crash from happening, but with the Dow hitting 23,000 points for the first time ever on Wednesday and the beginning of high-speed automated trading, some traders are not sure.