'87 crash caused by investors' irrationality

The Ticker

October 19, 1997|By Julius Westheimer

FIRST CAME the crash before "The Big Crash."

Although most people vividly remember the 508-point plunge on Oct. 19, 1987 -- the biggest one-day drop in history -- some may not recall what set the stage in the two weeks before.

In the 10 previous sessions, the Dow Jones industrial average fell from 2,641 to 2,246, a free fall of 395 points, or almost 15 percent.

On Monday, Oct. 5, the Dow ended unchanged, but Tuesday was a bad day, with the Dow falling 92 points. Prices edged slightly lower for three days, but for the week, the index tumbled 159 points.

Things got worse the following week.

Although Monday and Tuesday were "standoff" sessions, the Dow plunged 96 points on Wednesday, 57 on Thursday and 109 on Friday.

Then came Monday, Oct. 19. The 11-day drop pulled the blue-chip index down 902 points, or 34.1 percent.

Measured from today's market level, that two-week percentage drop would equal about 2,730 points, plunging the Dow to around 5,275.

Although this was little publicized, the Dow recovered in 19 months.

The usual factors were blamed for the crash: a bull market that had not had a correction in five years; fears of inflation and higher interest rates; and the collapse of "portfolio insurance." But no one could point to a single issue that accounted for the unprecedented plunge.

I favor a Yale University study, which concluded: "Herd behavior in the absence of material information caused the crash. No news event that day could account for the plunge. Our findings show the crash was caused by irrational behavior on the part of investors."

How did Baltimore brokers react?

Typical was account executive Mark Dyer, who recalled, "We stayed on our phones up to 11 p.m. for three days trying to reassure customers. Very few were discouraged for the long term."

Pub Date: 10/19/97

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