Thirty years on from 'Black Monday'

Thirty years on from 'Black Monday' Cathy Dixon says a fresh crash is far from a foregone conclusion.

ON October 19, 1987 the stock market plummeted, following the sharp falls in the US market which became known as 'Black Monday' – a date forever in the memories of those of us who lived through it. It was the biggest one-day percentage drop in the market in history (including the 1929 crash) which inevitably means it will figure prominently in investment history for the foreseeable future. It is of course inevitable that comparisons have been drawn recently – not least because of the huge storm which preceded it and we have seen two in the past week.

However, there are significant differences and it is rare that history repeats itself exactly. In the two years running up to the 1987 crash the S&P500 doubled in price; whereas over the past two years it has risen by a relatively modest 24 per cent. Valuations were hugely stretched thirty years ago and while we have seen the longest bull market in history over recent years, market conditions can be said to be different. Just as a reminder, in 1987 the Dow Jones Industrial Average fell by over 22 per cent in one day – if there was to be a repeat now the index would have to decline by more than 500 points.

One often forgotten fact is how short lived it was. Far from being the precursor to a prolonged depression, the market recovered relatively quickly and the FTSE 100 still finished the year higher than it started.

In the US the Federal Reserve was quick to intervene, cutting interest rates, which was followed by the Bank of England and elsewhere, which had the positive impact of stopping the rot. There is of course little scope for a similar action now with interest rates at or near their all-time low. One worrying similarity is the part program trading played then – it became the generally accepted scapegoat and measures have been put in place to halt trading and thus prevent a recurrence. It was a relatively new phenomenon back then, but these days stock markets are dominated by hedging and ETFs (exchange traded funds); with one recent estimate showing 60 per cent of stock market trading is accounted for by passive and quantitative investing. This should strike a note of caution.

The economic backdrop is in many ways very different now. With the low inflation, low interest rate environment that we live in now, yield is hard to come by; one of the reasons that the London stock market has been buoyed up. Central bank intervention in the bond markets (via quantitative easing) has had a profound negative impact on yields in these markets. There will always be the possibility of outside shocks, now as it was then, but these are usually utterly unpredictable. Few would argue that stock markets are fairly fully priced on historic measures, but with far faster flow of information and a marked lack of euphoria, which is so often present just before a sharp correction, perhaps a crash is not a foregone conclusion.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management ( SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.

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