What caused the 1987 stock market crash?

Were share prices too high before the 1987 stock market crash?

Stock prices had climbed for 5 years. The S&P 500 tripled from 102.42 on 12 August 1982 to 336.77 on 25 August 1987, and the Dow peaked at 2,722 in August 1987. Economist Martin Feldstein said prices were too high by historic and sustainable standards. A long climb builds confidence, and confidence raises the amount of borrowed money in the market.

A valuation ratio compares price with earnings. The S&P 500 traded at 23 times earnings, against a postwar average of 14.5, so prices carried little room for disappointment. A high ratio sets the size of the risk and leaves the date open, since markets can stay expensive for years. It shows how far a market can drop when sentiment turns, which is why valuation heads the list of causes.

How did the trade deficit and the dollar feed the 1987 crash?

On 14 October 1987 the Department of Commerce announced unexpectedly high trade deficit figures. The news weakened the dollar, pushed interest rates up, and pushed stock prices down. International investors had raised their activity in US markets through the 1980s, and a weaker dollar cut the value of their holdings in their own currencies. That gave them a reason to reconsider their US positions.

Currency policy had already created doubt. Industrial countries signed the Louvre Accord in February 1987 to stabilize currency markets, and doubts about its viability created a crisis of confidence in the dollar. When the Bundesbank moved to raise short-term rates, Treasury Secretary James Baker publicly clashed with the Germans, and his remarks were read as a threat to devalue the dollar.

What happened in the week before the 1987 stock market crash?

The Dow fell 95.46 points, or 3.81%, to 2,412.70 on Wednesday 14 October. It lost another 57.61 points, or 2.39%, on 15 October and 108.35 points, or 4.6%, on 16 October. The S&P 500 fell 9% over that week. Each lower close raised the number of margin calls and the number of investors who wanted to cut risk before the weekend.

That sequence matters for the question of causes. A fall of 22.6% on 19 October started from a market already under strain: Friday’s close of 2,246.74 stood more than 17% below the August peak of 2,722. The Monday crash looked sudden, and it arrived after 3 sessions of visible warning that investors could read in the daily prices.

Did the merger tax bill cause the 1987 stock market crash?

On the morning of 14 October 1987 the House Ways and Means Committee introduced a bill to reduce tax benefits for financing mergers and leveraged buyouts. Commentators named it as a trigger because takeover talk had supported many share prices. The bill added a policy shock to the same week as the trade deficit news.

Economist Robert Shiller tested the explanation with a survey of 889 investors, 605 individuals and 284 institutions. Only 3 institutional investors and no individual investors cited the tax news as a trigger. The most common answer was a gut feeling of an impending crash. A survey records the investors’ own account, and it places the tax bill low on the list of causes.

Which market mechanics widened the 1987 stock market crash?

Program trading carried selling from the futures market into the stock market. Index arbitrage, a form of program trading, sold stocks against futures whenever prices diverged, and it added confusion and downward pressure. The Federal Reserve also points to mismatched clearing and settlement timelines for stocks versus options and futures, which left exchanges with limited ability to intervene during large sell-offs.

Portfolio insurance sold index futures as prices fell, and the Brady Commission recorded margin calls about 10 times their average size. The page on portfolio insurance and the 1987 crash measures that effect, and the evidence shows a role of debated size. A Chicago Mercantile Exchange report found other investors had 3 to 5 times more influence than portfolio insurers.

Did investor psychology cause the 1987 stock market crash?

Fear spreads between investors, and the 1987 record shows how. Accounts of the crash describe a self-reinforcing contagion of fear and noise trading, where investors react to rumours and information they cannot measure. A falling price becomes news in itself, and news of falling prices brings more sellers. Psychology works as the accelerator on top of the other causes.

Feldstein argued that institutional and market factors exerted pressure in an environment of general anxiety. Shiller’s survey supports that view, since the gut feeling of an impending crash came first, ahead of any single event. Both readings agree that anxiety needs fuel, and in 1987 the fuel was high prices, borrowed money, and automatic selling rules.

How should you weigh the causes of the 1987 stock market crash?

Weigh causes by their role. Valuation set the size of the fall, the dollar and interest rates supplied the trigger, mechanics set the speed, and fear set the spread. This split helps because each layer asks for a different response: a valuation check, a currency check, a leverage check, and a plan for calm decisions. Rank the layers for your own portfolio before the next shock.

The same layers apply to today’s markets as of October 2026. A reader can test them on the EQOS Asia simulator by changing leverage, valuation, and confidence, then reading the outcome in a soft landing, a correction, and a crash. Return to the page on Black Monday 1987 for the day itself, and read the hub on the stock market crash for other crashes. This page is general information, not investment advice.

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About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile