Traders Warned of a Second Black Monday, but Market Data Points the Other Way

Traders spent the weekend bracing for a repeat of the 1987 crash

October 19 is the anniversary of Black Monday, the 1987 stock market crash. Over the weekend, many traders posted warnings that a similar crash could happen again, and those posts drew millions of combined views, according to Protos.

Protos reported that stock index futures priced late the night before pointed to slightly higher prices, with Dow contracts up 0.1%. That is far from the 22.6% drop the Dow suffered on October 19, 1987.

Protos said the fear appeared to grow out of a viral essay about a hidden, or "stealth," bear market said to be festering inside otherwise strong indices like the S&P 500. A bear market means a long period of falling prices.

How today's market compares with 1987

• In August 1987, the Dow peaked at 2,722 and had already lost about 17.5% by the Friday before the crash.
• Today, the Dow is within 4.5% of its all-time high, and the S&P 500 is within 2% of a record high.
• In 1987, the Dow had already fallen more than 10% across the three sessions before Black Monday. Protos said today's S&P 500 has not been falling at all until two trading days ago.
• Today's S&P 500 trades at an estimated 26 times trailing earnings, compared with a multiple of 23.3 at its 1987 peak.
• S&P 500 companies are growing earnings 29% a year on average as of their most recent quarter, with FactSet estimating a third straight quarter above 25%. In the three quarterly reports before the 1987 crash, earnings were roughly flat, between −1% and +4% year over year.

Two 1987 mechanisms that no longer exist

Protos said the 1987 crash was made worse by two features the market no longer has. The first was portfolio insurance, a type of pre-set stop-loss used by investment portfolios in the 1980s. The Kansas City Fed described it as selling futures automatically during the crash. US President Ronald Reagan appointed the Brady Commission to investigate Black Monday, and its report blamed portfolio insurance as one of the main sellers that day.

The second was the lack of modern circuit breakers. Stock exchanges in 1987 did not have them, according to the SEC. Today, US exchanges pause trading for 15 minutes after a 7% slide in the S&P 500, and a 20% decline closes the market for the day. Because of this, Protos said a 22.6% one-day drop in the US stock market cannot happen today.

What is confirmed

October 19 marks the anniversary of Black Monday in 1987, when the Dow fell 22.6%. Dow futures were up 0.1% in late trading the night before. Today's Dow is within 4.5% of its record high and the S&P 500 is within 2%. Modern US exchanges use circuit breakers that pause trading at a 7% S&P 500 drop and close markets for the day at a 20% drop.

What is still unclear

The fear of another crash came from traders and market commentators posting on social media, not from pricing data, according to Protos. Protos reported that there was little to no pricing evidence of an impending crash, so the warnings were speculation rather than confirmed signals.

Why the comparison matters

The comparison matters because the conditions that fed the 1987 crash were different from today's. Protos pointed to a market that is not already in freefall, no portfolio insurance selling, working circuit breakers, and companies growing earnings. These points are used by Protos to argue against a repeat of 1987, not to predict future prices.

Sources

• Protos