Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconceptionGeorge Soros
When stock markets are at record highs, thoughts turn to when they'll fall, as they always eventually do. Here’s a summary of some of the worst stock market crashes in history – there’s one for every day of the trading week.
Black Monday, 1987
The 30-year anniversary has just passed of Black Monday. This was surely one of the worst starts to the trading week that stock markets have ever known. On Monday 19th October 1987 a series of price crashes began that saw stock markets in both the US and the UK lose around a quarter of their value.
A BBC journalist reported at the time that a trader had said to him: “Watch those top story windows, because if this continues they’ll be jumping out of them.”
Causes are thought to include economic uncertainty, overpricing and early versions of electronic trading, which had recently begun to be used in the markets. The UK’s Great Storm of the previous Friday may have accelerated the crash as it led to London’s markets closing early unexpectedly on that day.
Black Monday prompted the development of “trading curbs” – rules that allow regulators to halt trading, including electronic trading, in the event of extreme pricing swings.
Black Tuesday, 1987
Thanks to timezone differences, Black Tuesday is the name given to Black Monday in Asia and Australasia. Countries here certainly have reason to remember its impact on their markets specifically. Stock markets in Hong Kong fell by 45.5% and ones in Australia by 41.8% following the events of Black Monday/Tuesday.
Meanwhile, that of New Zealand dropped by an astonishing 60% from its annual peak, the greatest fall anywhere and one from which it took the country’s economy several years to recover.
Geographical factors mean that trading floors in Australasia and Asia are often where the signs of stock market crashes are first seen, which was the case with Black Monday/Black Tuesday.
Black Tuesday is also the name given to the fourth, final and worst day of 1929’s Wall Street Crash (see below).
Black Wednesday, 1992
The Guardian’s economics editor Larry Elliott has called Black Wednesday – 16th September 1992, when the pound exited the European Exchange Rate Mechanism after a dramatic fall in value – “the day the Bank of England took on George Soros and lost”.
The UK government had decided to enter the pound into the ERM in a bid to reduce inflation and align the UK’s economy to Germany’s. However, the economy struggled to bear the stellar interest rates required to keep the pound’s value high enough to stay within its ERM-prescribed band.
Soros (and other traders) spotted these issues. On 15th September, Soros began selling sterling, hoping to benefit from a huge short position in it that he had built up.
By Black Wednesday, neither massive sterling purchases by the Bank of England, nor rises to the UK’s already high interest rates, could halt the pound’s tumble. This led to its withdrawal from the ERM and costs of around £3.3 billion to the UK’s economy.
Black Thursday, 1929
Black Thursday – 24th October 1929 – was the first day of the Wall Street Crash, the most notorious stock market crash of all. Bookended by the Roaring Twenties and the Great Depression, it saw four and a half days of trading drops and rallies. These culminated in a final Dow Jones fall of 13% that resulted in over £200 billion of losses in today’s prices.
Markets around the world were affected – London’s Daily Express reported at the time that the City’s trading floors became “as noisy as Epsom on Derby day”.
Possible long-term causes were economic difficulties and excessive market speculation. Short-term triggers include the arrest of a group of UK rogue traders and a popular commentator’s prediction that a crash was coming.
The crash saw around 4,000 trading institutions fail. “Banks overexpended their assets, failing to keep adequate reserve capital to cover potential losses,” says the Financial Times’s Gillian Tett in her book Fool’s Gold. A valuable trading lesson.
Black Friday, 1869
These days, Black Friday is synonymous with shopping. But 24th September 1869 was once known as the day when the activities of a ring of gold traders caused chaos on Wall Street.
The traders in question, James Fisk and Jay Gould, wanted to take advantage of then-president Ulysses S. Grant’s strategy of reducing America’s national debt by selling off gold reserves. Using social connections to Grant, they planted the idea that selling gold would be bad for US farmers. They then bought significant amounts of gold, hoping to profit when prices rose as supplies lessened.
Unfortunately for Fisk and Gould, Grant heard about the plan and released $4 million-worth of gold on Black Friday. The plot was foiled, but Wall Street stock markets fell dramatically and many traders went bankrupt.
The financial system of this era had little regulation of insider trading and was, says historian Howard Zinn, one that was “chaotic in its nature, in which only the very rich were secure”.
And the weekend?
What about Black Saturday or Black Sunday? Thankfully stock markets, like God and Craig David, take a break at the weekend so you’re safe from a crash – at least until Monday rolls round again…
It [is] impossible for governments running dumb economic policies to resist the power of the financial markets
Larry Elliott, Guardian economics editor