October 27, 1997 mini-crash
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The October 27, 1997 mini-crash is the name of a global stock market crash that was caused by an economic crisis in Asia. The points loss that the Dow Jones Industrial Average suffered on this day still ranks as the eighth biggest point loss since its creation in 1896. This crash is considered a "mini-crash" because the percentage loss was relatively small compared to some other notable crashes. But after the crash, the markets still remained positive for 1997, though the "mini-crash" may be considered as the beginning of the end of the 1990s economic boom in the United States and Canada, as both consumer confidence and economic growth were mildly severed during the winter of 1997-98 (with neither being strongly affected, compared to the rest of the world), and when both returned to pre-October levels; they began to grow at an slower pace than before the crash.
The crash started overnight in Asia as Hong Kong's Hang Seng Index plummeted 6%. However, the most widely watched Asian market, Japan's Nikkei 225, only fell 2% on the day. The losses spread to the European markets where London's FTSE 100 Index fell 98.90 points, or just about 2%, to 4,871.30. The Frankfurt DAX index fell sharply as well. The U.S. markets were widely expected to open lower for the day. The Dow, NASDAQ Composite, and S&P 500 all sank, never going to positive territory. At 2:36 pm, the Dow smashed through its first trading curb halt when it fell 350 points. Trading was halted for 30 minutes. When trading started again at 3:06 pm, stocks continued their immense slide eventually pushing the Dow through the NYSE's second trading curb at 550 points and ending trading for the day at 3:35 pm The second halt in trading is usually an hour timeout, but since there was only 25 minutes left in trading for the session the New York Stock Exchange had no choice but to take the controversial action of closing the Exchange early. Nasdaq trading went on until 4:00 P.M as usual.
By the numbers
The reason why this action was so controversial is because when the Dow went through its first trading curb at 350 points, the loss in the Dow only equated to 4.54%, not nearly enough to justify halting trading. One must also consider the fact that the Dow has fallen more than 4.5% on eleven different occasions between 1945 and 1997. Currently, the New York Stock Exchange sets the curbs at 10, 20, and 30%, and determines how much 10, 20, and 30% exactly is in point terms by where the Dow finishes at the end of the quarter.
By the end of the day, the Dow Jones Industrial Average plummeted 554.26 points, or 7.18%, to 7,161.15. This was the 12th biggest percentage loss and 3rd biggest points loss on record. The NASDAQ Composite fell 7%, or 115.41 to 1,535.51. The S&P 500 fell 64.63, or 6.86%, to 877.01. Several stock market analysts saw this crash as a "correction" to the overheated markets, which had doubled in value in 30 months. Even though this crash put the Dow down 12% from its all-time high of 8,259 on August 6, it still remained up from 1997's start level of 6,448 5/16 Volume also hit a record high. New York Stock Exchange volume topped 695 million shares, outstripping the previous record of 684 million shares traded on January 23, 1997. In 2006 terms, this would be considered extremely light volume. $663 billion in market capitalization was wiped out.
U.S. stock markets were widely expected to open lower for October 28, due to the Asian markets falling even more than they did on the 27th. Hong Kong's Hang Seng Index declined a staggering 14%. The Nikkei fell 4.26%. The U.S. stock markets initially continued their drop from the 27th, but abruptly ended, and began to climb. The Dow was down as much as 186 points by 10:06 am, and soon thereafter a rally started. By 10:20 am The Dow was down only 25 points. Five minutes later, the Dow roared back into positive territory and was up 50 points. Nine minutes later at 10:34 am, the Dow rallied to a triple-digit advance up 137 5/16 points. Stock prices continued to soar in choppy trading throughout the rest of the day. At the close of trading at 4:00 pm, the Dow finished with a record 337 3/16 point gain (recovering 61% of the previous day's loss) to close at 7,498 7/16. The market restored $384 billion of the $663 billion in market capitalization lost the previous day. One billion shares were traded on the New York Stock Exchange for the first time ever, with a volume of 1.21 billion shares. In 2006 terms, this amount is considered very light. The NASDAQ Composite also made a record gain on record volume, gaining 67 15/16 to 1,603 1/16. The NASDAQ also saw its first-ever one-billion share day with 1.23 billion shares changing hands.
Other massive losses and sharp rebounds
This was not the first time the market had large losses followed by a sharp recovery. Here are a few other instances:
- Stock Market Crash of 1929 – The Dow falls a total of 23% for October 28 and 29; then makes a sharp 12.84% rebound on the October 30. However, over the next several years the stock market fell dramatically.
- October 13 and 16, 1989 – The Dow plunges 190.50 points, or 6.9% on October 13, 1989 then rebounds 88 points on the 16th.
- Black Monday, October 19, 1987 and October 20 – The Dow suffers the biggest percentage loss in recorded stock market history on October 19 and initially continues its plunge on the 20th. The markets rally sharply in the afternoon and the Dow posts its first triple-digit gain in its history.
- The Securities and Exchange Commission's Analysis of the October 27, 1997 Mini-crash
- CNN/Money's Story on the Crash
- CNN/Money's Story on the Subsequent Rally