19 October 1987: Black Monday strikes

Black Monday may have occurred more than three decades ago but its impact left an indelible footprint on the market and it has fundamentally shaped the financial services industry since.

On 19 October 1987 markets endured their worst fall since 1929. Part of the reason for the infamous day’s lasting impact is that the crash happened with unprecedented haste as weak global economic conditions and nascent technology set about brewing a perfect storm.

Leading up to the crash, growth in the US economy – then as now the world’s largest – had already showed signs of slowing down.

New US Federal Reserve Chairman Alan Greenspan observed a cooling in the recovery which followed in the aftermath of the early 1980s recession. Signs of inflation were coming through, while the strong dollar was putting pressure on US exports.

Equities, particularly in the US, were also starting to look expensive. Computerised selling of portfolio insurance hedges also meant that traders were also encouraged to take more risk.

In the days prior to the sell-off, Iranian missiles were causing chaos on the high seas, while in the UK markets were unexpectedly closed for the day on Friday 16 October as the Great Storm wreaked havoc across Britain.

It was in Asia though where the first signs of trouble emerged, with Hong Kong suffering the first major fall, mirrored then by European, Japanese and US markets as they all opened to heavy losses.

In the UK, the FTSE 100 had dropped by some 11% while the Dow Jones collapsed by a monumental 508 points or 22.6%.[1]

However, unlike in 1929 and 2008, Black Monday did not represent the start of a great bear market as stocks began an immediate recovery the following day. Indeed, by the end of the year the Dow Jones had actually delivered a positive return over 12 months. 

While it’s hard to pinpoint the exact cause of the crash, programmatic traders took much of the blame and it wasn’t long before so-called ‘circuit breaker’ rules and other precautions were introduced to manage irregular patterns of trading.

London in 1987 was only just getting used to the electronic screen-based trading systems brought about by the previous year’s ‘Big Bang’ – the day the stock market was deregulated and the London Stock Exchange became a private company. Today computers take on even more of an important role. And, while we may live in a more sophisticated age, investors must still beware of complacency.

With a strong dollar, rising inflation and excessive valuations in certain parts of the market, the environment today is arguably not dissimilar to 1987 and now, as it was then, an active, long-term mindset is essential.

 

 

 

[1] https://www.wsj.com/articles/SB119239926667758592?mod=mkts_main_news_hs_h