KEY POINTS

*Monday's market dropped 7%; the one in 1987 was an eye-popping 22%

*Today's investors are edgy over an economy rattled by the coronavirus

*The '87 crash was brought on by the money supply and overvalued stocks

 

Wall Street's nosedive Monday may have dredged up some bad memories for older investors who were heavily entrenched in stocks in October 1987. The Dow Jones Industrial Average lost an astounding 22% in a single day.

The day was Oct. 19, 1987, also known as "Black Monday." The 1987 crash came after the Dow had more than tripled in five years.

Much like in the mid-1980s, there's been a big bull market in recent years. Since 2015, the Dow has surged from nearly 18,000 to over 29,500 in February before bouncing up and down before plummeting to 21,000 on day-after-day bad news about the global coronavirus outbreak.

There has been lingering optimism that U.S. equities could avoid a correction due to some encouraging economic signs. But hopes in recent days have waned for a second COVID-19 relief package and the number of new confirmed coronavirus cases keeps climbing.  

Similar to Monday's plunge, the crash of 1987 came about because of uncertainty.

But the reasons were vastly different. 

Economists believe Black Monday was triggered by a combination of a pair of currency deals and trade deals  — the Plaza Accord and the Louvre Accord — as well as computerized trading that sped up the selloff.

Such trade deals can be quite complicated for laymen.

The Plaza Accord, which intervened in currency agreements, was signed at New York's famed Plaza Hotel in 1985 by the U.S., the U.K., France, Germany and Japan. Under the pact, the Federal Reserve depreciated the dollar by 50% against the yen and the mark to address trade imbalances with Japan and Germany.

The U.S. had a trade deficit and Germany and Japan had trade surpluses. Depreciating the dollar was intended to stimulate the German and Japanese economies, allowing them to buy more American products. 

The deal worked. The gap closed and the stock market not only boomed but became overvalued.

In February 1987, the Louvre Accord — signed in Paris and again included the U.S., the U.K., France, Germany and Japan —  replaced the Plaza Accord. This time, the goal was to halt the decline of the dollar now that trade was more balanced. 

But the about-face caused the money supply to plummet through the summer and fall. Interest rates shot up and stock prices slowly sank until that fateful Monday in October.

Now, if that isn't enough to sort through, throw in the computerized trading. A selloff started. The volume was so large that the computers couldn't handle them. Some orders sat for more than an hour, which kept investors from knowing what stock prices really were. 

The upside of the computerized trading fiasco was that the exchanges put in circuit breaker rules to slow down selloffs like the one in 1987. 

While Monday's selloff wasn't nearly as significant as Black Monday, there are still questions as to whether another crash could happen.

According to economist Robert Shiller, it seems unlikely.

"We will have panics but not an exact repeat of Oct. 19, 1987," Shiller wrote in the New York Times on the 30-year anniversary of Black Monday. "In one way, the situation has probably gotten worse: Technology has made viral rumor transmission much easier. But there are regulations in place that were intended to forestall another one-day market collapse of such severity."