Every once in a while over the last decade or so I have heard about Black Monday, where mysteriously, the stock market dropped dramatically in October of 1987. The DOW dropped 22.6% in a single day. Which is a lot. I just ran across a very interesting academic paper that claims to know the cause of the drop—taxes (of course!). The paper, by Mark Mitchell and Jeffry Netter, is called “Triggering the 1987 stock market crash: Antitakeover provisions in the proposed house ways and means tax bill?” It says that there was tax legislation being considered that would have limited the deductibility of interest in some situations, and Black Monday was caused, in part, because of concerns around those limitations. That tax-related reasons were the cause behind Black Friday is an interesting possibility that I can’t find mentioned really anywhere else when I look at other pages dedicated to answering the question “What caused Black Monday?” But, since the answer is “taxes”, I am sure this particular answer is right.
It does, of course, relate to our current interest situation. The TCJA limited the deductibility for interest, and there is newfound evidence that those limitations are affecting capital structure. But, when that limitation was actually passed, instead of a market crash, we got a market surge.
