Remembering the 1987 crash, program trading, and the birth of the “Fed Put.” Lessons for today’s high-speed, high-valuation markets.
KEY TAKEAWAYS
The 1987 crash was triggered by program trading and excessive optimism
Technology has always fueled both innovation and instability
The “Fed Put” was born in the aftermath of Black Monday
Valuations today mirror those of 1987, but systemic safeguards have improved
Diligence and not prediction is the timeless investor edge
MY HOT TAKES
Every generation believes its technology is different–until it’s not
The global PC revolution was the AI of 1987
The spreadsheet didn’t destroy jobs, it created productivity
The market doesn’t punish optimism, it punishes complacency
Black Monday wasn’t the end, it was just a reset
You can quote me: “Risk never disappears–it just changes shape.”
Unusually hot. Yesterday in New York was like any Sunday in October, but it was unusually warm–perfect for a ride into the nearby suburbs for pumpkin picking and some apple cider. Fall is in the air! 🍂 I had a nice trail hike with Eloise the Cavapoo which gave me a chance to collect my thoughts for the week ahead. Just as my heart rate began to rise from the steep climb, I remembered a similar day many years ago–38 years actually. It was a Monday. It started to come back to me.
Stocks were on a tear and valuations were stretched. The price to earnings ratio of the S&P 500 was in the low 20s almost where it is today. Sue Herrera was the anchor on Financial News Network (FNN) and Ron Insana was on the floor of the New York Stock Exchange. CNBC didn’t exist yet! The Fed had just done a number of rate cuts and inflation was ticking higher, which caused it to reverse course with a few surgical hikes. It didn’t have to worry about the unemployment rate which was high but declining. The US economy was sizzling with GDP growing about 3%.
Tech was all the rage, a global PC revolution. The spreadsheet was threatening to cause massive job losses as accountants and bookkeepers became obsolete. I was using Lotus 1-2-3 in those days, though Microsoft had just launched Excel 2.0 for Windows earlier that year–a quiet revolution that would change everything. The spreadsheet, far from destroying accounting, became its greatest multiplier. What had once taken a team of analysts in a week could now be done in an afternoon. The PC didn’t end jobs, it supercharged productivity. 💪 The same story would play out in every technological leap that followed: fear of displacement giving way to new industries, new efficiencies, and new frontiers of growth.
But in 1987, the future was still uncertain. Wall Street’s “tech darlings” were names like IBM, Apple, Compaq, Hewlett-Packard, Digital Equipment, Lotus, Intel, and Sun Microsystems. IBM was THE tech poster child blue-chip. Apple was the young upstart, charismatic but volatile, still trying to find its footing after Steve Jobs’ dramatic exit two years earlier. Compaq was the fastest company ever to join the Fortune 500, selling IBM-compatible PCs. And Microsoft, barely a year public, was seen as a promising software company but nowhere near the behemoth it would become.
Technology had captured the market’s imagination. Hardware, software, and semiconductors were the AI, crypto, and cloud of their day. Tech was new, powerful, but poorly understood. Investors priced them for perfection.
The setup was classic: valuations stretched, sentiment euphoric, and investor confidence through the roof. Between January and August 1987, the Dow Jones Industrial Average surged nearly 44%. Every dip was bought. Every sell-off was shrugged off. It felt… er, easy. And like so many times in market history, when everyone agrees something can’t go wrong… … it already has.
The first tremors came in the bond market. Yields on the 10-year Treasury notes climbed from around 7% to nearly 10%. Inflation whispers were getting louder. A weak dollar, coupled with trade deficit worries, began to shake investor faith. If investors could earn 10% “risk-free” in Treasuries, the rich valuations in equities suddenly looked less justified–it’s just math, silly. 😉
And then, technology–the same force that had made the modern market possible–amplified its weakness. By 1987, Wall Street had begun deploying program trading. New tech emerged that allowed computers to execute large, coordinated orders instantly. The idea was efficiency, automating index arbitrage and risk management. A subcategory known as portfolio insurance was sold to institutional investors as a kind of hedge. If markets fell, the algorithm would automatically sell index futures to limit losses. It sounded like discipline. In practice, it was a self-reinforcing spiral. 😦
When the market began to weaken in the days leading up to October 19, those same “insurance” programs began dumping futures, pushing prices down. Lower prices triggered more selling, which triggered more selling. That Monday morning started calm enough. Futures opened weak, but nothing alarming. By 9:31 AM Wall Street Time, the market was already under pressure, and by 10:00, the decline had quickened. Traders watched as bids evaporated. Phones rang off the hook (yes phones, LOL). By 11:00, the Dow was down over 150 points. Selling programs were firing automatically, selling millions of shares at a time. Liquidity vanished as specialists on the floor of the NYSE refused to step in.
By noon, chaos ruled. The tape was hours behind, and no one could tell where anything was actually trading. Every attempted rally was crushed by another wave of selling. The futures markets and the cash markets fell out of sync. Index arbitrage broke.
At 1:00 p.m., the freefall accelerated and by 2:00, the Dow was down 300 points, and it became clear that something historic was happening. The scene on the NYSE floor was pandemonium. Clerks running in circles, traders shouting, paper flying like snow. And by the close, the number appeared: –508 points. A 22.6% collapse in a single trading day–the largest one-day percentage loss in US history.
The following morning, the world woke up dazed. There were fears the financial system would collapse entirely. But something remarkable happened. The Federal Reserve, under newly appointed Chairman Alan Greenspan, stepped in with a single, now-legendary statement: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirms today its readiness to serve as a source of liquidity to support the economic and financial system.”
Those 30 words (I counted them) changed everything. They became the blueprint for modern crisis management. The first “Fed put” was born! Confidence returned. Markets stabilized. By the end of the week, trading had normalized. Within two years, stocks had recovered their losses. Ok, take a breath. We survived–obviously.
The aftermath of 1987 reshaped markets in ways we still feel today. Circuit breakers were introduced. Risk models were refined. Program trading didn’t go away, but it evolved. What was once a blunt and dangerous instrument became the foundation for today’s algorithmic trading, market-making, and high-frequency trading systems. Technology didn’t destroy finance, but rather, it professionalized it.
Just like the spreadsheet didn’t destroy accounting, it made it better. The 1980s fear that automation would erase jobs gave way to a productivity boom. Accountants, analysts, and managers weren’t replaced; they were enhanced. Professionals became more efficient, decision-making improved, and profits rose. That boost in productivity helped fuel the economic expansion of the 1990s.
Fast forward 38 years. The setting feels strangely familiar: rich valuations, dominant tech names, and a belief that the music will keep playing. Today’s market darlings are Apple, Microsoft, Nvidia, Amazon, and Alphabet. They are the digital descendants of the IBM, Intel, and Compaq generation. Like their predecessors, they are reshaping industries, driving innovation, and also demanding what sometimes appears to be religious investor faith.
Today, technology is rewriting how markets function. Algo and high-frequency trading now account for the majority of daily volume. Today’s speed and scale dwarf anything imaginable in 1987.
Still, there’s a difference between then and now. In 1987, “portfolio insurance” created a false sense of safety. Today, risk models are far more sophisticated. We have circuit breakers, capital buffers, and real-time data that traders in the 80s could only dream of.
While stocks are undeniably expensive with forward PE ratios hovering in the low 20s again, the context is different. Inflation is sticky but manageable. The Fed is vigilant but not panicked. The economy is slowing but stable. Corporate earnings are solid. This isn’t 1987. But the timeless lesson remains: diligence matters.
What 1987 teaches us is humility. The recognition that even in a booming economy, risk never vanishes, it simply changes shape.
As Eloise tugged on her leash at the end of our hike, I looked down at the golden leaves scattered along the path. The air was warm, unseasonably so, but still carried that crisp edge that says winter is coming. It struck me then that the lesson of Black Monday wasn’t about fear. As investors, our job isn’t to predict every up and down, but to keep walking the trail, steady but vigilant, with an eye on the horizon… and a healthy respect for the terrain. The world didn’t end on that Monday. It recalibrated. And that’s what markets do best… over and over again. So much for a relaxing Sunday walk.
FRIDAY’S MARKETS
Stocks bounced on Friday as earnings quelled Thursday’s bank… discomfort. Gold pulled back as the fear melted away. 10–year Treasury note yields moved back over 4% reflecting the risk-on mood.
NEXT UP
No economic releases today due to the government shutdown. Even the private sector Leading Economic Indicator has been iced due to its reliance on government release.
Lots of earnings this week. In addition, we may get delayed Consumer Price Index / CPI, flash PMIs, New Home Sales, and University of Michigan Sentiment. Download attached earnings and economics calendars so you have a shot at greatness.
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