The lesson: A market can fall further and faster than any story requires, once selling begets selling by machine as well as by hand.
On October 19, 1987, now called Black Monday, the Dow Jones Industrial Average fell 22.6 percent in a single day, the worst one-day percentage decline in its history. No single piece of news that day explained a drop of that size. A large part of the selling was coming from computer-driven strategies, particularly portfolio insurance, that were programmed to sell more as prices fell.
Portfolio insurance was meant to protect investors: as a portfolio's value dropped, the strategy would automatically sell index futures to limit further loss. That sounds sensible for any one investor. The problem is what happens when a large share of the market is running the same program at the same time. One round of selling triggered the next round automatically, and that round triggered the next, a loop with no story behind it beyond the mechanism itself.
selling begetting selling
Once enough capital is running "sell when price falls by X," the selling itself becomes the cause of the next round of selling. It doesn't need a piece of bad news to keep going. It only needs the machinery to keep triggering. That's why the 22.6 percent figure looks so disconnected from anything happening in the real economy that week.
what recovered, and how fast
The market largely recovered the following year, which is its own data point. The businesses underneath the stocks hadn't lost a quarter of their value overnight. The price briefly reflected a mechanical unwind, not a reassessment of what anything was worth.
“The four most dangerous words in investing are: 'this time it's different.'”· widely attributed
Portfolio insurance was sold as a genuine innovation, a way to have upside participation with a downside floor. It worked exactly as designed for each individual account. What it wasn't built for was every account using it at once.