Market Analysis
1987 Market Crash
With the 1987 market crash, the S&P 500 lost 40% over a 2-month period, with most of that decline happening in just one week.
Market crashes are severe declines where the market plunges quickly. This is in contrast to bear markets which more gradually lose value and they also have bear rallies which temporally lifts the market value back up before the next decline.
While a 40% loss in a bear market is nothing unusual, this typically takes a number of years to achieve, whereas the 1987 market crash achieved most of that 40% loss in just one week!
Charts from stockcharts.com are used to analyze all of the market cycles that have occurred over the last ninety years. Analyzing the market cycles with charts gives stock investors a visual representation of how the stock market moves over time.
The S&P 500 index is the industry benchmark and is used to analyze the 1987 market correction and all market cycles from 1957.
The S&P 500 index was introduced to the stock market in 1957 and the index included back tested data to 1925 based on the historical prices of the stocks that made up the index. This provided historical data for comparison with the Dow Industrial Average.
90 Year Market Chart
The following quarterly 90-year bar chart shows the 1987 market correction which occurred during the 1982-1987 bull market.
Chart 90yr: 1987 Market Correction
Chart by stockcharts.com
As can be readily observed from the long-term 90-year market chart, the 1987 market crash is just one of many corrections and bear markets that have occurred over the last one ninety years.
The 90-year market chart also shows an 80-quarters (20-year) simple moving average which has spent most of the last ninety years trending upwards. This shows that over the long-term the market has broadly continued higher as the moving average followed the S&P 500 index higher.
20-year Market Chart
The following chart shows the 1987 bear market on a 20-year chart with the S&P 500 index plotted as a monthly bar chart.
Chart 20yr: 1987 Market Correction
Chart by stockcharts.com
A 12-month simple moving average is also plotted on the 20-year market chart. The 12-month moving average is a useful indicator used in Technical Analysis for highlighting market cycles.
As the 20-year market chart shows, the 12-month moving average flattened during the 1987 market correction.
The 1987 market correction was really nothing more than a rapid pullback and it only momentarily paused the markets climb to higher ground.
There was no real reason for the 1987 market crash, but the stock market had run up considerably with the 1982-1987 bull market which surged the market higher from the market congestion seen during the mid 1960s and 1970s. The likely cause was simply panic selling on fear that the market had gained too much too quickly, rather than for any economic reason.
Most investors new to the stock market are under the impression that the stock market only moves in the direction of the current market cycle.
In reality, the stock market moves in cycles and alternates between bull markets (where stock prices broadly increase) and bear markets (where stock prices broadly decline).
Fortunately for investors, bull markets are usually longer than bear markets. This means that stock prices spend more time increasing in value than they do losing value.
Bull markets last anywhere from two years to around a decade, whereas bear markets are shorter and usually last a year or two and sometimes three.
3-year Market Chart
The 1987 market correction is shown again with a shorter time-frame on a 3-year chart plotted as a weekly bar chart.
Chart 3yr: 1987 Market Correction
Chart by stockcharts.com
The shorter time-frame provides more detail. As the chart shows, the 1987 market correction occurred during the 1982-1987 bull market. The stock market lost 40% in just two months, with most of that loss occurring in just one week where the S&P 500 index just dropped in free fall.
Market Chart: Rallies and Pullbacks
The 1987 market correction is shown again with a 3-year line chart and two moving average indicators.
Chart MA: 1987 Market Correction
Chart by stockcharts.com
The above line chart for the S&P 500 index shows a 52-week (long-term) and a 12-week (short-term) simple moving average.
The 52-week moving average (purple line) turned downwards during the market correction that occurred during the 1982-1987 bull market.
The 12-week moving average (orange line) broadly identifies the rallies and pullbacks that occurred.
The market correction started in August 1987 (noted on the chart with the 2nd RH - which stands for Relative High) and was finished two months later in October 1987 (the 2nd RL - Relative Low).
The 1987 market correction looks like a pullback on the chart, but due to massive loss, it's more accurately referred to as a market crash.
The 1987 market crash finally ended the 1982-1987 bull market, but the market then resumed its upward trajectory with the 1988-1999 bull market.