Article Image
News Link • Stock Market

Why the most-recent selloff was just the beginning

•, Simon Black

It was "Black Monday." The selloff was so fast and so severe, nothing else even comes close.

The second worst percentage loss for the Dow was October 28, 1929 (also Black Monday) when the exchange fell 12.82%. It fell another 11.73% the next day (you guessed it… "Black Tuesday"). Then the Great Depression hit.

A lot of people blame portfolio insurance for the market drop in 1987.

Portfolio insurance was a popular product for large, institutional investors. It would "hedge" portfolios by selling short S&P 500 futures (which profit when the market falls) when stocks fall… the idea was, gains from selling the S&P futures would offset losses from falling stock prices.

If stocks fell more, the big investors would sell more futures.

The problem with portfolio insurance is it was programmatic. And when the losses inevitably came, it created a feedback loop. Selling begot selling.

But what initially ignited that selling back in 1987?

Matt Maley is a former Salomon Brothers executive who was on the trading floor for Black Monday. He shared his thoughts with CNBC last year to mark the 30th anniversary of the event.

Join us on our Social Networks:


Share this page with your friends on your favorite social network: