Ask Prof. Wolff: COVID-19 and the Stock Market Democracy at Work
Russia-Saudi Arabia oil price war
On 8 March 2020, Saudi Arabia initiated a price war with Russia, triggering a major fall in the price of oil, with US oil prices crashing 34%, crude oil crashing 26%, and brent oil falling by 24%. The price war was triggered by a breakup in dialogue between the Organization of the Petroleum Exporting Countries and Russia over proposed oil production cuts in the midst of the 2019-20 coronavirus outbreak. Oil prices had already fallen 30% since the start of the year due to a drop in demand. The fall in prices was one of the causes of the global stock market crash on 9 March 2020, colloquially known as Black Monday.
As a result of the 2019-20 coronavirus outbreak, factory output and transportation demand fell, bringing overall demand for oil down as well, and causing oil prices to fall. On 15 February 2020, the International Energy Agency announced that demand growth would fall to the lowest rate since 2011, with growth falling by 325,000 barrels per day to 825,000 barrels per day, and a contraction in consumption by 435,000 barrels per day. Although demand for oil was falling globally, a drop in demand in China's markets, the largest since 2008, triggered an OPEC summit in Vienna on 5 March 2020. At the summit, it was agreed to cut oil production by 1.5 million barrels per day through the second quarter of the year, with the group expected to review the policy on 9 June during their next meeting. On Friday 6 March 2020, Russia rejected the proposal, with oil prices falling 10% after the announcement.
The stock market crash of 1987 was a rapid and severe downturn in U.S. stock prices that occurred over several days in late October of 1987. While the crash originated in the U.S., the event impacted every other major stock market in the world. In the five years leading up to the 1987 crash, the Dow Jones Industrial Average (DJIA) had more than tripled. On October 22, 1987–known as Black Monday–the DJIA fell by 508 points, or by 22.6%, the largest percentage drop in one day in history. The crash sparked fears of extended economic instability around the world.
After this crash, the Federal Reserve and stock exchanges intervened by installing mechanisms called "circuit breakers," designed to slow down future plunges and stop trading when stocks fall too far, too fast.
KEY TAKE-AWAYS
The stock market crash of 1987 was a steep decline in U.S. stock prices over a few days in October of 1987 which also impacted other major world stock markets.
It is speculated that the roots of the crash lay in a series of monetary and foreign trade agreements– the Plaza Accord and the Louvre Accord–that depreciated the U.S. dollar in order to adjust trade deficits and then attempted to stabilize the dollar at its new lower value.
Computer program-driven trading models on Wall Street contributed to both the rise in stock prices to overvalued levels prior to the crash and the steepness of the decline.
Understanding the Stock Market Crash of 1987
After five days of intensifying declines in the stock market, selling pressure hit a peak on October 19, 1987, also known as Black Monday. Steep price declines were created as a result of significant selling; total trading volume was so large that the computerized trading systems could not process them. Some orders were left unfilled for over an hour, and these order imbalances prevented true price discovery.
Potential Causes of the Stock Market Crash of 1987
Heightened hostilities in the Persian Gulf, fear of higher interest rates, a five-year bull market without a significant correction, and the introduction of computerized trading have all been named as potential causes of the crash. There were also deeper economic factors that may have been to blame.
Under the Plaza Accord of 1985, the Federal Reserve agreed with the central banks of the G-5 nations–France, Germany, the United Kingdom, and Japan–to depreciate the U.S. dollar in international currency markets in order to control mounting U.S. trade deficits. By early 1987, that goal had been achieved: the gap between U.S. exports and imports had flattened out, which helped U.S. exporters and contributed to the U.S. stock market boom of the mid-1980s.
In the five years preceding October 1987, the DJIA more than tripled in value, creating excessive valuation levels and an overvalued stock market. The Plaza Accord was replaced by the Louvre Accord in February 1987. Under the Louvre Accord, the G-5 nations agreed to stabilize exchange rates around this new balance of trade.
In the U.S., the Federal Reserve tightened monetary policy under the new Louvre Accord to halt the downward pressure on the dollar in the second and third quarters of 1987 leading up to the crash. As a result of this contractionary monetary policy, growth in the U.S. money supply plummeted by more than half from January to September, interest rates rose, and stock prices began to fall by the end of the third quarter of 1987.
The Role of Program Trading
The Stock Market Crash of 1987 revealed the role of financial and technological innovation in increased market volatility. In automatic trading, also called program trading, human decision-making is taken out of the equation, and buy or sell orders are generated automatically based on the price levels of benchmark indexes or specific stocks. Leading up to the crash, the models in use tended to produce strong positive feedback, generating more buy orders when prices were rising and more sell orders when prices began to fall. After the crash, exchanges implemented circuit breaker rules and other precautions that slow down the impact of trading irregularities so that markets have more time to correct similar problems in the future. Today, if stocks dove by even 7%, trading would be suspended for 15 minutes.
While program trading explains some of the characteristic steepness of the crash (and the excessive rise in prices during the preceding boom), the vast majority of trades at the time of the crash were still executed through a slow process, often requiring multiple telephone calls and interactions between humans.
With the increased computerization of the markets today, including the advent of high-frequency trading (HFT), trades are often processed in milliseconds. As a result of incredibly rapid feedback loops among the algorithms, selling pressure can mount within moments, and huge losses can be experienced in the process.
In 1974 I was at the height of my independent business venture as a Signmaker & Street Artist on the island of Nantucket in Massachusetts, however I was involved in partnerships that went "South" in mid-May of that year, triggering a downward spiral and collapse of these enterprises, It was far more practical for me earn wages helping to renovate dining room of an island resort hotel while "Pearl Diving" (washing dishes, pots, and pans) in the main kitchen & tap room downstairs. ~ Joseph David Henry Ware Bryan-Royster
TODAY: March 9, 2020... The Market is Tanking Again. OMG!
US trading halted as shares plunge around the world
On the Nasdaq Composite, hard drive maker Western Digital fell 11% and Tesla 10%
Oil firms Apache and Marathon oil led the S&P 500 index down, dropping 40% apiece.
The oil price fell nearly 30% to $31.14 on Monday, its biggest single-day fall since the start of the first Gulf war in 1991, before recovering slightly to trade 20% lower.
"It shows a level of nervousness in the market which I haven't seen in a long time," said Justin Urquhart-Stewart, co-founder of Seven Investment Management.
Investors are selling stocks at such a rate because they cannot quantify what Saudi Arabia and Russia might do, he said.
Russ Mould, investment director at stockbroker AJ Bell, said: "Back in January the UK stock market was near an all-time high, the US stock market was at an all-time high and markets had become very optimistic, almost complacent, the classic late stage of a stock market cycle. Investors think things will get better forever."
One hundred years ago, a new influenza virus appeared and swept across the globe, killing between 50 and 100 million people. Two NIAID experts, Dr. Jeffery Taubenberger and Dr. David Morens, discuss why the 1918 flu was so deadly, and what resurrecting the virus from preserved tissues has taught us.
If a similar pandemic arose today, could we stop it? Watch this video to find out more: https://youtu.be/lePhU_RA01k
To hear more from Dr. Taubenberger about why he studies 1918 influenza, check out this additional interview excerpt on the NIAID Now blog: https://www.niaid.nih.gov/
More than 100 years ago, celebrations marking the end of the First World War were cut short by the onslaught of a devastating disease - the 1918-19 influenza pandemic. Its early origins and initial geographical starting point still remain a mystery but in the Summer of 1918, there was a second wave of a far more virulent form of the influenza virus than anyone could have anticipated. Soon dubbed ‘Spanish Flu’ after its effects were reported in the country’s newspapers, the virus rapidly spread across much of the globe to become one of the worst natural disasters in human history.
To mark the centenary and to highlight vital scientific research, the University of Cambridge has made a new film exploring what we have learnt about Spanish Flu, the urgent threat posed by influenza today, and how scientists are preparing for future pandemics.
