Black Monday 30 years on – could the stock market crash again?

18 October 2017

This week - 19 October to be exact - marks 30 years since “Black Monday”, the largest single stock market crash in living memory.

The markets were at the apex of a five-year bull run, but then the US Dow Jones index fell 22.6% in one day, far worse than the previous record of 12.8% during the Wall Street crash of 28 October 1929.

Meanwhile, here in the UK, the FTSE 100 fell by 10.8% in just 24 hours. In a week, the index had lost 26.8% of its value.

Andrew Rose, equities fund manager at Schroders, recalls the surreal atmosphere in London that surrounded Black Monday. “It was an exceptional time for the stock market,” he comments. “We hadn’t seen anything like the performance in stock prices before and we haven’t seen anything like it since. And it coincided with one of the greatest storms [The Great Storm of 1987] the UK has ever seen, which bizarrely ended up contributing to market falls.”In the years since, investors have blamed worries surrounding a turn in the fortunes of the global economy and rising inflation. Others have pointed to rumours of an interest rise in the US and political tensions between the US and Iran that were threatening to spill over.

Some of the blame was also apportioned to a technological glitch. James Bateman, chief investment officer of multi asset at Fidelity International explains: “Black Monday was the first market crash to be blamed on automatic trading programmes. Programmatic traders essentially relied on selling stocks as they fell, thus limiting the damage to their own portfolios. But when everybody sold, it drove the market to crash more.”

Worryingly, Mr Bateman adds: “Programmatic or rules based trading have been blamed for other crashes, most notably the 2010 flash crash, when the S&P 500 lost 6% in just 20 minutes.”

However, despite the massive short-term losses recorded on Black Monday, the stock market still eked out a positive one-year return.

Stock market short-term performance after Black Monday:

Source: Thompson Reuters datastream/ Tilney Investment Management, October 2017.

As Mr Rose summarises: “At the time you felt it was the end of the world, but looking back it was just a blip. The UK and the US stock markets rebounded strongly in the late 80s and throughout the 90s.”

Stock market long-term performance after Black Monday:

Source: Thompson Reuters datastream/ Tilney Investment Management, October 2017.

 What can we learn from Black Monday?

Some pundits would point to similarities between 1987 and today’s market environment. Expensive equities and bullish sentiment, coupled with an atmosphere of political uncertainty on both sides of the Atlantic could prove a dangerous combination.

Simon Watkins, a financial journalist, author and trader, comments: “The similarities in market-related and geopolitical factors in the run up to the 1987 crash and current day are remarkable and certainly prognosticate a significant crash.

“However, this doesn’t mean Armageddon for investors. Correctly positioning a portfolio in anticipation of such a fall allows investors not just to avoid catastrophic losses but also to make alpha-returns in the immediate aftermath and beyond.” 

Ian Peackock, head of UK at IG Group and IG Smart portfolios, adds: “The best response to any market crash is to avoid panicking; stocks getting cheaper – effectively trading at a discount to yesterday’s price –  improves the outlook for future returns.

“In the intervening 30 years [following the 1987 crash], the dotcom bubble and 2008 global financial crisis have illustrated that markets are still susceptible to both extreme risk-taking behaviour and short-term panic when things go wrong. A diversified portfolio will help shield you from the worst excesses.”

According to analysts at Hargreaves Lansdown, in 1987 investors would have seen £10,000 invested in the FTSE All Share index reduced to £6,610 in a matter of weeks. However if they had waited 5 years, their investment would have fully recovered, and 10 years later would be worth £32,690, with dividends reinvested. Today that investment would be worth £104,340.

At Moneywise, we recommend investing in funds rather than individual stocks, as these collective investments diversify the risk associated with investing in single stocks. You should also minimise risk by diversifying the funds you hold across a wide range of different asset classes, such as equities, bonds, property, and cash. To find out more, read Moneywise’s First 50 Funds for beginner investors and see our Coffee-break investment plan.  

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