After '87, today's fear is the mini-crash

20 years after the Dow plunged 22% in a day, Wall Streeters aren't too worried about a repeat. But what about a smaller version of that disaster?

By Alexandra Twin, senior writer

NEW YORK ( -- A lot of Wall Streeters are reminiscing this week about where they were during the 1987 crash. The more recent tumult - in 2001 and even earlier this year - gets lost in the chatter.

The combination of circuit breakers instituted by the NYSE, and the Federal Reserve's willingness to intervene, means a crash on the level of Oct. 19, 1987 - in which the Dow plunged 22.6 percent on a 508-point loss - probably won't happen again.

Remembering Black Monday Remembering Black Monday Remembering Black Monday
On Oct. 19, 1987, the Dow fell 22.6% in a single day. Fortune asked 10 Wall Street veterans to share their memories of the crash.

But that doesn't mean the market won't - and hasn't already - experienced severe mini-crashes that crush investors and roil the markets for days or even weeks at a time.

"Could it happen again? Not to the level of severity as in 1987, but you could see a version of it again," said Kevin Melich, senior portfolio manager at Chartwell Investment Partners.

Take, for example, the market chaos that erupted in the wake of the Sept. 11 terrorist attacks.

At least on a psychological level, the Dow's 684-point plunge on Sept. 17, 2001, represented a crash. That marked the first day of trading after a four-session halt. The panic and almost across-the-board selling that ensued felt like something of a crash. Among the few sectors that managed gains that day: bomb detection software makers and other defense stocks.

Sept. 17, 2001, still holds the record for the Dow's biggest one-day point loss. But in terms of percentage losses, the drop of 7.1 percent doesn't even make the top-ten list. It was a shock and a panic, but not a "crash."

For many people, even those that don't follow the market closely, a "crash" is synonymous with the devastation of 1929 and, to a lesser extent, 1987.

"I don't think you can set forth any specific parameter of what is a crash," said William Hummer, principal at Wayne Hummer Investments. "It's more of an 'I'll know it when I see it.' "

Philip J. Roth, chief technical market analyst at Miller Tabak, described a crash as what happens when "everyone gets on one side of the market." Roth was speaking at a Dow Jones symposium on the crash and its ramifications.

Thanks to protective measures put in place after the '87 crash, the market has not since experienced a one-day decline of the magnitude of the 1987 crash. The infrastructure was on display most recently this summer, particularly during unusually heavy trading in August, when anxiety about the credit market crisis came to a head.

Two factors protect investors from another crash: the circuit breakers and the Federal Reserve.

Updated quarterly, the NYSE's current rule is that if the Dow plummets 2700 points in a given day - a loss of 20 percent - the market shuts down. If this happens before 1 p.m., the closure lasts two hours. If it happens between 1-2 p.m., the shutdown lasts one hour. If it happens after 2 p.m., the market is shut down for the day.

A 10 percent decline triggers similar measures. The maximum the Dow can lose in a single day is 4050 points, or 30 percent. Should that happen, markets shut down for the day.

The market has never experienced anything like that, but it has seen a series of mini-crashes, including the period after 9/11.

Other examples include: March 12, 2001, when the Dow tumbled more than 436 points in the midst of the big correction that followed the end of the 1990s tech boom.

Two others came earlier this year. On Feb. 27, plummeting Asian markets caused a domino effect in global markets on worries that the period of strong global growth was ending. On that day, the Dow plunged over 416 points.

And on July 26, fears about the collapse of the housing market and tightening of the credit markets sent the Dow falling 311 points.

In all those cases, within a matter of days - sometimes by the next morning - the market had stabilized and traders had used the selloff as an opportunity to move back in.

All are examples of modern mini-crashes. But a true crash on the level of the more famous ones in history would probably materialize today as a series of mini-crashes in a short period of time coinciding with mini-crashes in global markets, Hummer said.

A serious shock to the system would have to happen to cause that kind of reaction, Hummer said. What could cause that significant a shock? Analysts say it would take an international military event or global financial crisis.

However, even the impact of a prolonged market meltdown would be tempered by the second big protection: central banks around the world.

True, Ben Bernanke and the other Fed bankers have made it clear that its not their job to bail out financial markets. But they have also made it clear that they won't let markets flounder to the extent that it sends the economy into recession.

That's how the Fed reacted to the tumult this summer, when stocks plunged 10 percent in August in a matter of weeks.

Circuit breakers and other technical aspects of the infrastructure kept the daily declines orderly, and the Fed cut the discount rate, which impacts bank loans, and then ultimately the fed funds rate, which influences consumer loans.

And the Fed was not alone, with banks around the world stepping in to manage the global liquidity crisis by infusing billions into their banking systems.

All of which is likely to continue keeping a lid on, but not prevent modern-day mini-crashes.

"People are more educated now, more inured to volatility than they were in '87, but what we saw this summer was a great object lesson in what can still happen," Hummer said.  Top of page