Black Monday Anniversary: A Look at Stock Market Meltdowns

Circuit breakers, Rule 48, and the aftermath of the 1987 stock market crash

by Andrea Kramer

Published on Oct 17, 2017 at 2:11 PM

This Thursday, Oct. 19, will mark the 30th anniversary of Black Monday -- when the stock market notoriously crashed in 1987. This week, we'll be publishing a handful of features in observance of the event, kicking off today with stats on stock market performance before Black Monday, the hypothetical CBOE Volatility Index (VIX) reaction, and how the S&P 500 Index (SPX) has performed after its last dozen meltdowns.

SPX in 1987

SPX annual returns 1980 to 2000

Stocks were doing very well before the Oct. 19, 1987 stock market crash. At its 1987 high on Aug. 25, the index reached 337.89 and was up nearly 40% year-to-date, according to Schaeffer's Senior Quantitative Analyst Rocky White.

What's more -- and what many people may not realize -- is that even despite Black Monday, the S&P managed to log a 2% gain on the year, marking its sixth positive annual return. The index gained another 12.4% in 1988, and 27.3% in 1989.

Panic in the Options Pits

While the VIX -- or the stock market's "fear gauge" -- wasn't officially launched until 1993, reverse engineering by the Chicago Board Options Exchange (CBOE) shows us just how panicked the stock market was on Black Monday. The CBOE S&P 100 Volatility Index (VXO), which basically uses the pre-2003 VIX volatility calculations and has price history going back to 1986, rose 313% to an all-time closing high of 150.19.

The following day, "Everyone wanted to own put options and the bid/ask markets reflected the panic," Mark Wolfinger recalled. "[T]he chasm was indescribable," and option premium that Tuesday was through the roof. "Implied volatility reached values so high that they have never been seen again."

Circuit Breakers and Rule 48

In the wake of Black Monday, circuit breakers were introduced to halt trading if the stock markets make a huge move lower in a matter of hours. Until the October 1997 "mini crash," circuit breakers were triggered by Dow Jones Industrial Average (DJIA) point drops, as opposed to SPX percentage drops. Now, there are three circuit breaker tiers that could temporarily halt trading, assuming they happen before 3:25 p.m.: a 7% drop halts trading for 15 minutes; a 13% drop halts trading for 15 minutes; and a 20% drop halts trading for the remainder of the day.

Evolving from that, Rule 48 came into play in late 2007, and was first invoked on Jan. 22, 2008, around the start of the financial crisis. In a nutshell, the Securities and Exchange Commission's (SEC) Rule 48 is designed to calm the markets before the opening bell, when stocks are signaling a huge drop out of the gate. Rule 48 was invoked several times in August and September 2015, and premarket circuit breakers were triggered after the 2016 presidential election shocker.

SPX After Meltdowns

Below are the instances when the S&P 500 Index (SPX) dropped 7% or more in a single day, going back to Black Monday. The last time this occurred was on May 6, 2010, during the market's "flash crash." Five of the massive SPX drops happened in the throes of the financial crisis in 2008, prior to which you'd have to go back to April 2000 for a 7% intraday drop. There were no SPX declines of this magnitude in the 1990s.

SPX after 7 percent drop

It's also interesting to note that seven of the 12 crashes below happened in the month of October (but we'll have more on that tomorrow). Of course, five of those were October 2008, which skews the S&P's three- and six-month returns after big drops, considering the market bottom wasn't in place until March 2009.

Nevertheless, the stock market index tends to outperform after massive down days, likely as traders go bargain hunting. The SPX averages one-day and one-week returns of 2.94% and 4.46%, respectively, after these drops, with a win rate of 75%. That's much higher than the index's average one-day and one-week anytime returns since 1987, per data from White. In fact, with the exception of the three- and six-month time periods, due to the aforementioned 2008 data, the SPX performs much better than usual across the board one year after a big drop.

SPX performance after crashes


As alluded to earlier, make sure you tune back in tomorrow for the second part in our Black Monday Anniversary series, where we'll discuss the worst days of the year to own stocks, historically, and take a look at notable stocks that survived that notorious day.
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