Today's the 20th anniversary of the 1987 stock market crash, when share prices plunged round the world. Could it happen again?
Today is the 20th anniversary of the 1987 stock market crash. On so-called Black Monday, share prices around the world plummeted as the investment landscape changed within a matter of hours.
And as equity markets climb back towards their old highs, I ask: Could it happen again two decades later?
Whilst some purists might quibble that the real equivalent of Black Monday is after this weekend, history records that on the 19th October 1987, shares around the world plunged in unison. Investors who had enjoyed an almost uninterrupted bull market since 1974 saw their portfolios completely pole-axed within 24 hours.
And, for what it's worth, I can say I was 'there.' As a (relatively!) young City fund manager. Though I recall reaching the office that day a bit later than usual.
It was the aftermath of the Great Storm that had blitzed Southern England. Trees blown over like matchsticks across railway tracks had stopped me getting to work on Friday. So I was looking forward to a fairly quiet day to catch up with the financial news.
Some hope! Screens flashing red manically, huge volatility, total mayhem...it was blowing a gale in the market as well...by a long chalk the most traumatic day's trading I'd ever seen.
At close of play, London shares were down over 10%. Then Wall Street joined in with a 23% tumble. By the time the dust had settled, the London market had lost over 26% of its value. Which was by no means the worst fall as markets round the world fell victim to the carnage. Spain shed over 30% while both Australia and Hong Kong collapsed over 40%.
What caused the crash?
A very good question. Because no one has ever satisfactorily diagnosed the catalyst for the tidal wave of selling.
Shares had clearly become overvalued in the weeks and months leading up to the crash. I recall being constantly amazed about how indiscriminately prices had been soaring. Almost every stock in every market seemed to be going up sharply, regardless of company profitability or valuation.
It certainly felt like a speculative bubble. From the start of 1987 until that fateful day in October, UK shares had surged 37%. It's very hard to justify that on economic fundamentals.
Fingers have also been pointed at so-called ‘program trading' strategies, i.e. computer driven dealing mechanisms that automatically kick-in when stock prices move sharply. Use of program trades by Wall Street firms had massively increased in 1987 and some analysts believe they were responsible both for the prior speculative build up and the subsequent crash.
Others have blamed the US ‘twin' deficits (both budget and trade), interest rate rises, market illiquidity...but whatever the exact reasons, I believe it's important to learn the overall lessons.
Could it happen again?
Yes. In stock markets, always be prepared to expect the unexpected.
Will it happen again soon?
Probably not. Markets are more sophisticated now. I'm cautious about share price levels at the moment but I don't see 1987 repeating. More likely in my book would be the market topping out, then sliding down gradually as profit expectations are progressively disappointed.
But keep an eye on warning signs like excessive speculation, heavy share buying on borrowed money, and stock valuations losing contact with reality. When everyone you know is punting the market, it's time to get out.
Broadly though, if you're a stock market investor, you have to be able to stomach bad news. Shares aren't a one way upward bet. Because they can suddenly drop sharply, at the Fool we recommend drip-feeding your money into the market so you cash in if prices fall. Here's more information on index trackers.
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