Trump and the dollar are doing something we saw just before the October 1987 stock market crash

The comparison between current market conditions under President Donald Trump in 2025 and the period leading up to the October 1987 stock market crash, known as Black Monday, hinges on several economic and political parallels, particularly regarding the U.S. dollar and trade policies. Below is an analysis of the similarities and differences, drawing on available information and critically examining the narrative.

Similarities to 1987

1. Weakening U.S. Dollar:

• 1987 Context: In the lead-up to the October 1987 crash, the U.S. dollar was under significant pressure due to persistent trade deficits and international agreements like the Plaza Accord (1985) and the Louvre Accord (1987). The Plaza Accord aimed to depreciate the dollar to address trade imbalances, while the Louvre Accord sought to stabilize it at a lower value. However, doubts about the Louvre Accord’s effectiveness led to a crisis of confidence, contributing to market volatility. Treasury Secretary James Baker’s public threat to devalue the dollar further on October 17, 1987, exacerbated investor fears.
• 2025 Context: Recent reports suggest the U.S. dollar is again experiencing downward pressure, partly due to Trump’s aggressive tariff policies announced on April 2, 2025, dubbed “Liberation Day.” These tariffs, imposed on all imported goods (with exceptions for pharmaceuticals, semiconductors, and lumber), have sparked fears of a global trade war, which could weaken the dollar further. The article from RocketNews explicitly notes that the current political environment and currency market disruptions are “disturbingly similar” to 1987, with the dollar’s decline linked to trade tensions.

1. Trade Deficits and Protectionism:

• 1987: The U.S. faced a larger-than-expected trade deficit, which undermined investor confidence and contributed to the dollar’s decline. Protectionist sentiments were rising, and tensions with trading partners like West Germany and Japan over trade imbalances added to market jitters.
• 2025: Trump’s universal tariffs have reignited concerns about trade deficits and retaliatory measures from trading partners. The imposition of a 10% tax on all imports and reciprocal tariffs on dozens of countries has led to significant market sell-offs, with the S&P 500 experiencing its largest two-day decline since March 2020. This mirrors the 1987 trade-related anxieties, as tariffs are seen as a “massive tax hike” on consumers, potentially leading to stagflation.

1. Market Volatility and Overvaluation:

• 1987: The stock market had seen extraordinary gains, with the Dow Jones Industrial Average (DJIA) rising 44% in the first seven months of 1987, stoking fears of an asset bubble. The market was considered overvalued, with a price-earnings (P/E) ratio above 20. The crash was exacerbated by automated trading strategies like portfolio insurance, which triggered mass sell-offs when prices fell.
• 2025: The S&P 500 and DJIA have recently experienced significant declines, with the S&P 500 down 15% since Trump’s “Liberation Day” and the DJIA and Nasdaq dropping 9.3% and 11.4% over two days, respectively. Prior to the tariff announcements, the market had been in a bull phase, raising concerns about overvaluation. While automated trading is more sophisticated today, the rapid sell-off suggests similar panic-driven dynamics.

1. Policy Uncertainty:

• 1987: Uncertainty around monetary policy, rising interest rates, and the Reagan administration’s response to the trade deficit (including Baker’s comments) fueled market instability. The introduction of a bill to reduce tax benefits for corporate mergers added to investor unease.
• 2025: Trump’s unpredictable tariff policies and the threat of a trade war have created significant uncertainty. Analysts like Jim Cramer have warned of a potential “1987 scenario” if Trump does not mitigate the impact of tariffs by negotiating with trading partners. The lack of clarity on how far the administration will push its protectionist agenda mirrors the policy uncertainty of 1987.

Differences from 1987

1. Economic Backdrop:

• 1987: The economy was in a strong growth phase, with the DJIA tripling from 1982 to 1987. The crash did not lead to a recession or banking crisis, partly due to the Federal Reserve’s swift intervention under Alan Greenspan, who slashed interest rates and injected liquidity.
• 2025: While the economy was described as “booming” before the tariff-driven sell-off, there are now fears of a recession or stagflation due to the supply shock from tariffs. Unlike 1987, where the crash was a short-term event, the current downturn is tied to ongoing policy decisions, with potential for prolonged economic disruption. A strong employment report in 2025 is noted as a buffer, but its protective effect is uncertain.

1. Market Mechanisms:

• 1987: The crash was amplified by primitive automated trading systems, particularly portfolio insurance, which automatically sold futures contracts as prices dropped, creating a feedback loop. Circuit breakers were introduced post-crash to prevent such spirals.
• 2025: Modern markets have circuit breakers and more advanced trading systems, reducing the likelihood of a single-day 22.6% drop like Black Monday. However, the scale of the sell-off (e.g., $5 trillion in market capitalization lost) suggests that high-frequency trading and investor panic can still drive significant volatility.

1. Federal Reserve Response:

• 1987: The Fed acted decisively, cutting interest rates and ensuring liquidity, which helped markets recover quickly (the DJIA regained 57% of losses in two sessions).
• 2025: The current Federal Reserve’s response is less clear. With interest rates already low, there is limited room for cuts, and analysts question whether the Fed will intervene as aggressively as in 1987. The focus on tariffs as a policy-driven shock complicates the Fed’s role, as monetary policy may not directly address trade-related disruptions.

1. Global Context:

• 1987: The crash was global, with markets in Hong Kong, Australia, and Europe dropping significantly, but the U.S. was the epicenter. The Louvre Accord’s failure was a key international factor.
• 2025: The global impact of Trump’s tariffs is more pronounced, with retaliatory tariffs from trading partners amplifying the downturn. The interconnectedness of modern markets means that a U.S.-driven crash could have broader implications, but the specific trigger (tariffs) is more policy-driven than in 1987.

Critical Examination

• Narrative Scrutiny: The comparison to 1987 is compelling but not exact. While the weakening dollar and trade tensions are similar, the 1987 crash was driven by a confluence of factors, including automated trading and a specific policy misstep (Baker’s comments). In 2025, the tariffs are a deliberate policy choice, not a misstep, and their impact is unfolding over days rather than a single session. The narrative of a “Black Monday 2.0” may be amplified by media (e.g., Jim Cramer’s warnings) to draw attention, but the structural differences in market safeguards and economic conditions suggest a different trajectory.
• Trump’s Role: In 1987, Trump was a private businessman who claimed to have sold all his stocks before the crash, a move he later touted as prescient. His current role as president directly influencing market conditions through tariffs contrasts with his 1987 position as a market observer. This shift from commentator to catalyst adds a unique dimension to the comparison.
• Market Resilience: The 1987 crash was followed by a quick recovery, partly due to Fed intervention and the absence of a broader economic collapse. In 2025, the risk of a recession or stagflation is higher due to the supply shock from tariffs, which could prolong market distress beyond the 1987 pattern.

Conclusion

The similarities between the 1987 Black Monday crash and the 2025 market downturn—driven by a weakening dollar, trade tensions, and policy uncertainty—are notable, particularly in the context of Trump’s tariffs echoing the trade deficit concerns of 1987. However, differences in market mechanisms, Fed policy constraints, and the deliberate nature of the tariff policy suggest that the current situation may not replicate the single-day catastrophe of 1987 but could lead to a more sustained downturn if trade wars escalate. Investors should monitor the administration’s next moves and global responses, as these will determine whether the market enters a bear phase or stabilizes. For further details on Trump’s tariff policies, see https://x.ai/grok for economic updates or https://help.x.com/en/using-x/x-premium for market-related discussions.