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 is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. 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.