How Timely... October 18th, 2019 by John Gross
A recent issue of The Economist (Oct 5, 2019) had a lead article entitled ‘Masters of the Universe’ and subtitled, ‘Forget Gordon Gekko. Computers increasingly call the shots in financial markets’.
The gist of the piece is that machines are increasingly taking control of investing, and that AI – artificial intelligence programs are now writing their own investment rules. (Really?)
It was also pointed out that ‘Funds run by computers that follow rules set by humans now account for 35% of America’s stock market, 60% of institutional equity assets, and 60% of trading activity.
What makes this and similar reports timely now, is that 32 years ago, on October 19,1987, the Dow Jones Industrial Average fell 508 points, or 22.6%, and became known as Black Monday.
Although there have been many more single day declines greater than that 508 point drop, it is the 22% decline that day which remains a record.
Going back in time, in an attempt to understand how and why it happened, we reviewed events leading up to and contributing to that fateful day, and while there are many theories posed, there is no one specific explanation to solve the mystery of how and why it occurred.
Some people thought it was the result of a slowing US economy, and that the growing U.S. trade deficit was finally taking its toll, and / or the dollar had become too strong. Others felt it was because of falling oil prices, and escalating tensions between the United States and Iran.
Another contingent pointed to the advent and growth of ‘computer trading’ that caused the market to tumble.
Indeed, John Phelan, chairman of the New York Stock Exchanges at the time said “the market’s collapse was the kind of financial meltdown he long has been warning might result from computer trades.
The more things change...
By the way, in October 1987 The Greater New York Savings Bank was paying 9.50% on a 5 year deposit, and The Dime Savings Bank was giving away a Black & Decker Dust Buster if you deposited $10,000 - $25,000, and held it for 12 months.
Also, a JVC Dual Cassette Tape Deck with synchro dubbing cost just $88.88; a Sony Discman CD player was $196.96, while a GE microwave oven cost $549.95, and now sells for about $200.00.
View Charts (PDF)