Thirty years ago investors were stunned as global stock markets collapsed like a chain of dominos.The day became known as Black Monday as months and years of share price rises were reversed in a single day of trading.One dealer recalls being so stunned “jaws were hitting the desk”.In August 1987, every major US index hit record highs. But in Autumn of that year investors began selling – and – by October, at a rapid rate.
Pessimism appeared to be setting in the days running up to Monday 19 October. Both the Dow Jones and the S&P 500 had lost more than 9% over the week by the time markets closed on Friday 16 October.That loss had Asian investors playing catch-up when they opened for business on Monday. And as more markets opened, that selling activity in Asia sparked more selling in Europe, leaving the US playing catch-up with the losses it had originally inspired. By the end of the day, the Dow Jones had fallen by more than 20% and the UK’s FTSE 100 by 11%. It ended up as the steepest crash since 1929.
“Our mouths were wide open, our jaws were hitting the desk,” says Peter Borish, who at the time was second in command at Tudor Investment Corp, a US hedge fund.Tudor was one of the few firms to predict the crash and ended up turning a profit by innovative use of computer modelling.”Fear always trumps greed and fear was at its maximum point then, so when people are fearful rationality goes out the door and they just start selling.”
The exact reason for the dive is still a point of discussion.Many recall the delays in hearing news from other markets around the world. Computer technology and the internet were, after all, still in their infancy and 24-hour television news had yet to take off.”There was blood running through the streets of Asia and it was slamming Europe and I had no idea because there was no news or television the way there is today,” says Kenneth Polcari, a 26-year-old rookie in New York when the crash hit. “The newspaper I was reading was a day old already.”This also meant that stock exchange trades had to be executed by hand on paper slips, so the high volumes of selling meant deals were delayed by hours.But a popular explanation is that Black Monday is the first instance of computer trading gone wrong. At the time, a fledgling computer program used by financial firms around the world provided insurance for stock portfolios.It did this by issuing sell orders when stock index futures reached a certain level in order to protect companies from further losses.But as global selling accelerated and losses increase, this created a feedback loop as more and more sell orders were made.”At the end of the day it happened because nobody chose to question the computer,” says Kenneth Polcari, now managing director of O’Neil Securities.
But despite the huge fall in prices, stock markets around the world made a comparatively quick recovery.In the aftermath, central banks cut interest rates to encourage banks to continue lending, helping to protect the flow of money.New regulations were also put in place, including “circuit breakers” which created an automatic halt in trading if markets fell by certain levels.Over the next five years, US stocks grew nearly 15% a year, and UK and European markets rose at rates of around 8%. “If you look at charts from the Second World War to today, there’s a general trend from bottom left to top right and the 1987 crash was only a small interruption to the general direction,” says Richard Hunter, head of research at Wilson King Investment Management.So are there signs that another market correction could be coming?”The fact of the matter is that we’re in a pretty sweet spot at the moment. Corporate earnings are very strong, particularly in the States. Europe is in a recovery phase. The return on bonds is next to nothing. And providing companies keep their promises, these growth levels are sustainable.”But will the good times last forever?”What free market economists are reluctant to admit is that markets are by their very nature unstable,” says Dr Victoria Bateman, an economist and economic historian at Cambridge University.”The best thing we can do is acknowledge that fact and not overpromise on what markets can deliver so we can weather any potential storm.”