On Oct. 19, 1987, the Dow Jones Industrial Average plummeted 22%. That one-day drop, the largest in U.S. history, became known as Black Monday.
The 30th anniversary of the '87 stock market crash is today, and so is the potential for another huge drop.
In fact, another crash isn't just possible, it's probable.
Once again, seemingly smart Wall Street products, pregnant with potential unintended consequences and combined with regulatory ignorance and complicity, practically guarantee it.
Here's what caused the crash in '87, and the chilling truth about the one thing that's different this time that will make the next crash worse…
History Loves to Repeat Itself
The bull market that began in 1982 took stocks 160% higher by 1987.
While that's a great run, it barely compares to stocks in the current bull market, which are up 277% since 2009. Since March 2013, when the Dow eclipsed the 14,200-mark set in 2007, stocks are up 63%.
Leading up to the 1987 crash, equity price increases had been outpacing earnings growth and lifting price-to-earnings ratios in a very similar pattern to what we see today.
Like today, market commentators and analysts were calling the market overvalued in 1987.
The inﬂux of new investors into the market during the 1980s, predominantly pension funds and retirement account money, increased demand for shares and drove prices up. These days, new investors like the growing passive investing crowd are likewise increasing demand for stocks and boosting prices.
Equities were additionally supported in 1987 by favorable tax treatment for corporate buyouts, allowing ﬁrms to deduct interest expenses associated with debt issued for buyouts.
The list of companies that were potential takeover targets was growing… and so were their stock prices.
Today, proposed tax cuts for businesses, favorable cash repatriation talk, and hoped-for accelerated depreciation scheduling are bullish news for stocks.
It's clear that conditions are eerily similar, just with a more topical twist. But if we take a look at the actual timeline of the '87 stock market crash, something else becomes clear.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.