'Black Monday' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Black Monday refers to three separate stock market crashes that coincidentally happened on Mondays. These were the crashes of October 19 in 1987, the one on October 28 in 1929, and the stock market correction crash of August 24 in 2015.
The Black Monday in 1987 proves to be the most common reference for the phrase. It was the biggest single day percentage drop in the markets in the history of the stock market. This dark day saw the Dow Jones Industrial Average plunge 22.61% on October 19, 1987 when the market cratered 508 points down to 1738.74. At the same time, the S&P 500 plummeted 57.64 points down to 225.06 for a 20.4% loss. The Dow did not recover this single day loss for two years.
The background to this crash started with a five year long bull market. The Dow Jones had run up 43% in just 1987. This brought it to a peak o 2,747.65 in the trading session of August 25, 1987. A little bit lower range held over a month until October 2. At this point, the markets began to decline precipitously. They declined 15% over the two weeks that led to Black Monday.
Various studies were done to determine what caused this nearly 37% drop in the markets in two weeks. The SEC Securities and Exchange Commission analysis decided that traders’ nervousness about anti takeover legislation being reviewed in the House Ways and Means Committee led to it.
On Tuesday, October 13 they introduced this bill, and it passed October 15th. In only three days, stocks tumbled over 10%. This represented the biggest three day decline in markets in 50 years. The securities which declined the most steeply proved to be the corporations which would have suffered most from the legislation’s impacts.
The bill had proposed to do away with a tax deduction on corporate takeover loans. Congress was attempting to better regulate the markets. Wall Street reacted with Black Monday. The upsetting tax deduction proposition was removed from the bill before it passed into law after the damage in the stock markets had already occurred.
More factors than this aggravated the crash. Stock trading programs were already computerized at this point. They caused the sell off to be worse than it should have. These programs were set up with sell stop loss orders that entered sell orders as the markets declined by a specific percentage. As the programs all began to react at the same time, the New York Stock Exchange dealers became overwhelmed. There simply were not enough buyers available on some of the stocks. This forced them to halt trading on the exchange.
Besides this, an October 16th announcement from then Treasury Secretary James Baker unsettled the markets. He stated the U.S. could permit the dollar’s value to fall. This would have created lower stock prices for foreign investors. A great number of them decided to sell then to buy back in after the dollar declined. Baker was only attempting to lower the worrisome increase in the U.S. trade deficit.
Numerous investors, economists, and observers feared that the devastating crash would lead to recession. The Federal Reserve managed to hold it off by forcing money into banks. This stabilized the markets and led to a partial recovery. At the conclusion of October, the Dow was back up by 15%. The rest of the year saw the Dow confined to a narrower trading range. It stayed between 1,776 and 2,014 until 1988. Though there was no direct recession resulting from Black Monday, it did serve as a precursor to the Savings and Loan Crisis of 1989 and the recession of 1990-1991.