Johannesburg - In the US, where the carnage wiped nearly 23 percent off the value of the New York Stock Exchange (NYSE) on that Black Monday, an increasingly uncertain economic outlook set the scene.
The uncertainty, however, had failed to moderate the frenetic pace of mergers and takeovers - often financed by dubious debt - at a time of rapidly rising interest rates as US inflation rose and the country's trade deficit widened.
The pressures had built as the year progressed. But two bits of bad news pushed the market to tipping point, on Wednesday, October 14.
The events are recounted by US Federal Reserve governor Mark Carlson, in a description of the episode that appears on the Federal Reserve website.
One trigger for the events that followed was a report that tax benefits, which had eased the costs of financing corporate action, were to be eliminated. This put a stop to the euphoria that had been driving the frenzy.
The other trigger was news that the US trade deficit for August was far bigger than expected.
On this news "the dollar declined and expectations that the Federal Reserve would tighten policy increased", Carlson says.
"On Thursday equity markets continued to decline. Some of this decrease was attributed to anxiety among institutions, especially pension funds, and among individual investors, which led to a movement of funds from stocks into the relative safety of bonds."
The deterioration continued on Friday.
"By the end of the day, markets had fallen considerably, with the Standard & Poor's 500 index down over 9 percent for the week," Carlson says. "This decrease was one of the largest one-week declines of the preceding couple of decades, and it helped set the stage for the turmoil the following week."
When the NYSE opened on Monday, the market had been falling for three days, and there were more sell orders than buy orders in the market, according to Carlson.
As the day progressed, a number of factors conspired to accelerate the fall.
Investors in the futures market had been borrowing against the value of their contracts - a practice called borrowing on margin.
As investors' positions lost value, they were faced with a margin call - in other words, they had to make good the shortfall in their margin accounts.
As the situation rapidly deteriorated on Monday and margins collapsed at an accelerating pace, investors were forced out of their positions - en masse.
As stop-loss programs kicked in, large volumes were sold at a pace that would have been impossible a decade earlier. The programs magnified the losses.
"When a lot of institutions do this, the effect is pouring gas on a fire," says fund manager and columnist Whitney Tilson, recounting the events of the day. "They created a doomsday machine that kept selling and selling."
The record trading volume overwhelmed many systems.
"On the NYSE, for example, trade executions were reported more than an hour late, which reportedly caused confusion among traders," says Carlson. "Investors did not know whether limit orders had been executed or whether new limits needed to be set."
But he says one of the most damaging forces at work was the lack of reliable information "in the rapidly changing and chaotic environment".
The absence of information quickly translated into waves of panic selling.
When the day was done, nearly $500 billion (R3.4 trillion at yesterday's exchange rate) had been wiped off the value of companies listed on the NYSE. From its high on August 25 1987 to its low point on October 19, the Dow Jones industrial average fell 36 percent.
Analysing the events of the day, Carlson says: "The crash of 1987 is a significant event not just because of the swiftness and severity of the market decline, but because it showed the weaknesses of the trading systems and how they could be strained and come close to breaking in extreme conditions. The problems in the trading systems interacted with the price declines to make the crisis worse."
The fallout was not confined to the US. The knock-on effect sent stock markets crashing round the world.
The London Stock Exchange didn't wait for events to unfold in New York that Monday; it followed its own momentum down. According to the BBC, "the value of quoted shares fell by £50 billion as the FT 30-share index dived 183.7 points to 1629.2. The FTSE index crashed more than 300 points with a loss of £63 billion".
The disaster spread further the following day.
An article in Fortune magazine in December 1987 described the impact on the rest of the world as US investors brought money home.
"While the Dow Jones fell 25 percent between October 13, when the slide began, and November 10, London's FT 100 index plunged 33 percent."
Continental bourses were hit even harder, says Fortune. "Though London was booming almost up to Black Monday, Paris, Frankfurt and Milan had been steadily retreating for most of the year. Yet when the crash came, Paris and Milan dropped almost as much as London, while Frankfurt fell further. Hong Kong was the world's biggest loser - the Hang Seng index took the deepest dive, 47 percent over 29 days."
Other casualties listed by Fortune were Singapore, down 44 percent over the 29 days, and Sydney, which lost 44 percent. Tokyo's Nikkei index had fallen 19 percent by November 12 from its high in October. And the BBC said Australia had fallen nearly 42 percent by the end of October.
In South Africa the disaster came on Black Tuesday and took local investors unawares.
The JSE no longer has daily figures for 1987, but its records show the all share index fell from 2677 at the end of September to 2041, 1926 and 1820 at the ends of the following months - a decline of 32 percent in all.
Clive Roffey, a technical analyst, has kept the daily data. He says: "That day the high on the JSE overall index was 2672, the low was 2446 and the close was 2476. The final low was at 1503 in February 1988." This is a fall of 44 percent.
Many lessons were learnt from the events of Black Monday, among them the merits of installing circuit breakers to prevent extreme changes in the stock market.
But perhaps the most important was the role of the monetary authority in keeping markets functional.
The worst fears that a recession would follow the stock market collapse were not realised, because Alan Greenspan, who took over as chairman of the US Federal Reserve Board in August 1987, took action.
The Washington Post reported: "On the Friday before Black Monday, he convened the first of a series of daily telephone conference calls with other members of the Fed board and officials at the 12 regional Fed banks. The calls, which continued every working day for two weeks, were intended to keep tabs on what was happening and to decide how to respond."
And on Tuesday before the markets opened, Greenspan announced that the nation's central bank stood ready "to serve as a source of liquidity to support the economic and financial system".
After Greenspan's intervention, the Dow rose "more than 100 points - the biggest one-day gain up to that time," according to the BBC.
But Carlson says that over the course of the day, "about 7 percent of stocks, including some of the most active, were closed for trading by the specialists as order imbalances made maintaining orderly markets difficult".
Once confidence returned, the market recovered in a relatively short time. The Dow Jones achieved its precrash level in the second half of 1988.
Greenspan's prompt action restored normality and prevented economic consequences.
And it introduced a new approach to financial crises on the part of central bankers. Now, as then, they pump liquidity into ailing markets.
- Could we face another Black Monday? On Thursday we publish the second installment of this three-part series on Black Monday.