20 years later, could markets crash again?

NEW YORK -- Wall Street loves its sayings. Buy low and sell high. Don't fight the tape. Don't try to catch a falling knife.

A useful one now might be one that historians often trumpet: Those who forget the past are doomed to repeat it.

Twenty years ago Friday, the U.S. stock market suffered its worst one-day drop ever: the Crash of '87. The Dow Jones industrials plunged 508 points, or 22.6%, as waves of selling swamped the New York Stock Exchange. It was a market dislocation so intense that some pundits predicted another Great Depression.

The dire predictions turned out to be wrong. But while one-day declines of that magnitude are extremely rare — one study says crashes are likely to occur once every 75 years — the Black Monday anniversary has prompted Wall Street to wonder: Can such a swift loss of wealth occur again?

A legitimate question. Markets now have many similarities to just before Black Monday. Surging oil prices. A slowing economy. Stocks near records in an aging bull market. Volatility on the rise.

When it comes to financial panics, you can never say never. But most Wall Street experts stress that crashes are low-probability events. A cataclysmic crash, they say, is usually the result of many financial stresses converging at once — and one big dollop of mass hysteria. New regulations, better technology and more proactive central bankers make major financial dislocations less likely. Still, it's hard to predict when and if the market will derail. Given the history of financial panics and the tendency of market psychology to change from bullish optimism to flat-out fear virtually overnight, crashes might never be eliminated from Wall Street's vocabulary.

The big one

Not many people on Wall Street today were working there in 1987. But for those who were there for the free fall, the memories are vivid.

The crash was breathtaking in its sheer, devastating size: An equivalent plunge today would rip the Dow down nearly 3,200 points. A record 604 million shares traded on the NYSE that day, choking the system from the outset.

A third of the 30 stocks that make up the Dow didn't open for the first hour because sell orders swamped buy orders. "It was worse than hell," says Jim Rutledge, a retired NYSE floor specialist. The selling cascaded throughout the day. As bad as the ticker looked, the situation was far worse: Trades were executed and recorded as much as an hour late. "Information dried up," Rutledge says. "We were still living on the tape, and the tape was so far behind, it was useless."

Computerized trading programs kept dumping more stocks onto the market as it plunged. The losses intensified as traders, worried that regulators would shut the market down, scrambled frantically to get out of their positions. Nearly half the Dow's loss happened in the last hour of trading.

"What was most surprising to everyone was how liquidity disappeared," says James Stack, editor of InvesTech Market Analyst, and one of the few advisers to get his clients out of the market before the crash. "If you wanted to sell a stock, there were no buyers."