Cassius
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« Reply #1 on: December 06, 2021, 06:32:57 PM » |
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« Edited: December 07, 2021, 04:50:28 AM by Cassius »
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The week before Black Monday had already been a bad one for the markets, with the contagion starting in the US. This bad week was brought on by a variety of factors, proximately by a new bill that had been introduced in the House of Representatives that would made corporate takeovers more costly, but more generally due to; unease due to the length of the bull market; worries over the trade deficit (the figures announced for that week had been notably poor) and weak dollar (the Fed spent much of the year hiking interest rates in line with the policy adopted at the Louvre accord designed to prop up the dollar's value); and other unfortunate coincidences, like the big hit that the London stock exchange took on October 16th due to the Great Storm.
So the sell off had already started well before 'Black Monday'; however, things got really hairy when the markets opened that week, again, thanks to a number of factors. Firstly, there had been significant withdrawals from mutual funds over the weekend thanks to the generally bearish atmosphere, which the funds then had to cover by selling shares on the Monday. Portfolio insurance techniques also came in for significant (although perhaps overstated) criticism, as the computer programmes that informed these strategies recommended selling as the market went down, which of course led to a kind of feedback loop, as selling caused prices to fall further which in turn encouraged more selling. Some investors also attempted to get ahead of the game by selling first thing on Monday which also contributed to the rapid decline that was seen on that day.
In short, a lot of little factors came together and suddenly caused things to give way, as is often the case with stock market crashes. Of course, there were reasons for investors to be concerned in 1987, given that the US economy was not as strong as it looked and the Fed was adopting a decidedly hawkish monetary policy at that time. Incidentally, Alan Greenspan (who had only just become Fed chairman), significantly eased monetary policy in response to the crash, which was the start of the famous (or infamous, or significantly overrated, depending upon your point of view) 'Greenspan put', whereby Fed monetary policy generally went more towards the dovish side, where it has largely stayed ever since.
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