J. Kent Smith ’88 still remembers the fear and tension he and his friends felt when stock markets around the world plummeted on October 19, 1987, a day also known as “Black Monday.”
Smith and his friends were huddled silently around a transistor radio in Dunster House, listening to news that the Dow Jones Industrial Average had recorded its largest single-day percentage loss.
“It was the first time this had happened in modern history,” Smith said. The last time the Dow had posted a record single-day loss was in 1929, and the crash had plunged the nation into the Great Depression.
But the Black Monday crash dwarfed the 12 percent drop of 1929, with a 22.61 percent decline in prices.
As policymakers and economists around the world sought to find explanations for the crisis, Smith and other students at Harvard watched nervously from the sidelines.
For juniors and seniors considering a career in finance, October’s crash was particularly alarming, as students prepared to enter the job market in the midst of unprecedented market turmoil.
“It was definitely a big-impact day,” said Smith, now an executive director at UBS Investment Bank.
“Nobody knew quite what to make of it and how it could have happened.”
Most analysts today agree that the rise of computerized trading techniques led to the sudden collapse in stock prices.
With new strategies such as portfolio insurance and program trading, much of the buying and selling of securities on Wall Street was conducted by automated programs.
“In retrospect, we have a pretty good idea of why it happened,” said Smith.
But Smith also noted how unexpected market behavior can quickly lead to disaster, even when investors are equipped with the best predictors and financial models.
“When you have a systemic shock to the system, which is what we had in 1987 and again [in] the housing market crash, the rest of the markets don’t behave rationally,” Smith said. “The size of the shocks are sufficiently large to ripple across the entire economy.”
Smith remembers that even on Harvard’s campus, the effects of the crisis felt very real.