Black Monday: Is another stock market crash likely, 30 years later?

Black Monday: Is another stock market crash likely, 30 years later?

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Black Monday was the largest ever one day crash in history of the stock market

On October 19, 1987, the US Dow Jones index lost 22.6 per cent of its value with $500 billion (£296.9 billion at the time) wiped off share values.

This was far worse than on Black Monday during the Wall Street crash of 1929, when the market fell “just” 12.8 per cent.

The FTSE 100 also fell 10.8 per cent as losses totalled £50 billion, with new computer systems crashing as panic-stricken investors rushed to offload their stocks.

Many feared the entire financial system would shut down and were bracing themselves for a repeat of the 1930s Depression.

Worryingly, a growing number of analysts are warning the autumn of 2017 could deliver a repeat performance.

Wall stGETTY – STOCK IMAGE

It was far worse than on Black Monday during the Wall Street crash of 1929


We managed to reduce client exposure to stock markets, although not to the extent we would have liked

Brian Dennehy


MONDAY, MONDAY

With Prime Minister Margaret Thatcher and President Ronald Reagan in their pomp, the 1980s were a bumper time for stock markets.

The Dow Jones average of 30 industrial stocks rose a dizzying 27.66 per cent in 1985, then 22.58 per cent in 1986.

By August 1987, the US market was up another 40 per cent and investors started to worry that share prices were overvalued.

The Great Storm of 1987 swept the UK on October 15 and 16, just as the stock market panic reached hurricane force.

Brian Dennehy, managing director of financial adviser Dennehy Weller, recalls battling past flattened trees into his office in Chislehurst, Kent, on the Friday before Black Monday and desperately trying to dump client funds: “We managed to reduce client exposure to stock markets, although not to the extent we would have liked.”

After a nervy weekend when newspapers effectively ran their obituaries for the stock market, share prices collapsed.

This was a very different world to the high-tech digital one we know now.

Dennehy says: “There was no 24-hour news, no Sky, no Bloomberg, no internet. All we had was a small transistor radio to keep us updated.”

However, he sees plenty of parallels with today, claiming that the US stock market is now “horribly inflated”, and he is not alone.

PAINT IT BLACK

Investors have enjoyed an eight-year bull market since March 2009, when central bankers slashed interest rates to near zero in the immediate aftermath of the financial crisis but now many are getting edgy.

Technology stocks such as Google, Facebook, Netflix and Apple are booming but in August Goldman Sachs warned share prices had an “elevated valuation on almost every metric”.

Billionaire hedge fund manager Ray Dalio has warned of heady stock valuations, as has Nobel Prize winning economist Robert Shiller.

Today’s market looks even more over-valued than in 1987, with US companies trading at 23 times their earnings, against 20 times back then.

So how black do things look?

VOLATILE TIMES

Mark Taylor, chief customer officer at online broker Selftrade.co.uk, says a combination of asset bubbles inflated by years of monetary stimulus and downbeat investor psychology could spell trouble.

“Also, the last two large market corrections occurred in a year ending with the number 7: October 1987 and the financial crisis in 2007. You do not have to be superstitious to notice that stock markets broadly operate in 10 to 20-year cycles,” he says.

Low wage growth, rising personal and government debt, company cost-cutting and endless austerity have hammered the economy and sentiment.

Taylor now puts the probability of another crash as “somewhat likely, but far from certain”.

This does not mean you should dump all of your investments, such as stocks and shares and Isas.

He says: “Unless you have a reliable crystal ball, you cannot accurately time the stock market.”

However you should perhaps be cautious before putting a large lump sum into today’s pricey market.

Those who already plan to cash in any shares or funds in the near future might want to act sooner rather than later.

For everybody else, if you are able to leave your money invested for at least five years, you can probably afford to ride out any oncoming volatility.

Stock marketGETTY – STOCK

Black Monday did not trigger the economic and social meltdown many predicted

BOUNCING BACK

Perhaps the strangest thing about Black Monday was that it did not trigger the economic and social meltdown many predicted.

In the US, Federal Reserve chairman Alan Greenspan stepped in with interest rate cuts and the Bank of England and others followed suit, stopping the rot.

Investors took advantage of reduced share prices and started buying again.

The FTSE 100 lost 36 per cent of its value during the October sell-off but it ended the year higher than it started.

When the panic subsided, the 1980s’ bull market resumed as if nothing had happened, with the Dow leaping 11.85 per cent in 1988 and 26.96 per cent in 1989.

It then powered on at a breakneck pace throughout the 1990s.

Investors have plenty of reasons to be nervous right now, with North Korean nuclear concerns, Donald Trump’s controversial presidency, UK political uncertainty and Catalonian revolt threatening the EU.

However, the message from Black Monday is to avoid panicking at short-term stock market movements. Shares are volatile but can quickly recover, even from the biggest crash.

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