Wall Street situation recalls 1987 'Black Monday'

NEW YORK: October 19, 1987: on what has been dubbed 'Black Monday' Wall Street suffered the worst one-day capital losses in its history in an unparalleled financial earthquake.

International markets also got caught in the dramatic maelstrom, which quickly snowballed into a global panic. The Dow Jones Index collapsed, plunging by more than 508 points or 22.6 percent, to close that day at only 1,738 points.

Investors lost more than $500 billion in a single day on the New York stock market.

This drop was almost twice as big as the Stock Market Crash on October 28, 1929, when the prime US market indicator fell by 12.8 percent, preluding the world economic crisis of the 1930s known as the Depression.

The Depression continued for several years as US stocks lost an average of 80 per cent in value.

After the Black Monday plunge 20 years ago, the US Federal Reserve under its new chairman Alan Greenspan made it very clear that it was willing to offer the banks an absolute safety net.

It made a statement that it stood ready to provide liquidity to support the economy and the financial system.

In emergency meetings with large financial institutions and investment banks, the Federal Reserve created a basis to quickly limit the dramatic Wall Street crisis.

By early 1988, the Dow again was back up to 2,000 points, where it had ranged in early 1987. With the vast release of the Fed's funds, the US economy was soon heading towards expansion again.

Despite several intermittent setbacks, the Dow Jones Index has now reached a level of around 14,000 points, seven-fold the level of two decades ago.

The worst downturn since Black Monday came after the dot-com bubble burst and the terrorist attacks of September 11, 2001.

Wall Street's history had seen a previous massive October downturn with one coming exactly 100 years ago, in 1907. Then, the legendary banker John Pierpont Morgan (1837-1913) prevented an emerging Wall Street panic injecting massive amounts of money into the market.

The causes of Black Monday are still being debated today, and so far, no satisfactory answers have been found. There is one common thread in every stock market panic, however: Suddenly, stockholders want to sell all at the same time - but nobody wants to buy.

Parallels between Oct 1987 and the current situation at Wall Street are more than obvious: There has been a five-year rise in the market. The dollar is on a downswing. Oil prices are exploding.

The US also is running huge deficits in its current accounts and budgets. China is the dreaded economic rival now, while Japan was back then.

The US construction industry and property markets are once again under considerable strain. Twenty years ago, a savings bank crisis was evolving, while today, mortgage companies are going bankrupt, one after the other. Then there were Mideast problems, today it is the Iraq conflict.

However, US shares are selling at 16 times their expected 2008 earnings, projections, compared with the exaggerated price-earnings ratio of 22 back then.

The yields from public bonds are below 5 per cent - only half the rate of return 20 years ago. The US Federal Reserve under its current chairman Ben Bernake has just begun to reduce the federal funds rate.
 
Following the Oct 1987 debacle, the New York Stock Exchange has developed so-called "circuit breakers" - when losses get too great, they automatically interrupt trading on the world's largest stock market.

Many investors still remember Black Monday as well as the 70-percent price drop of NASDAQ-stocks after the burst of the speculative internet and technology stocks bubble between 2000 and 2002.