Black Monday 30 years on: how it happened and what we can learn

It has been 30 years since Black Monday, the biggest one-day fall in stockmarket history. We look at what happened and how today’s markets compare to 1987.

On 19 October 1987 global stockmarkets came crashing down amid worries about a slowing global economy and high stock valuations. The concerns were compounded by a computer glitch. In the space of 24 hours stockmarkets in Asia, Europe and the US suffered falls of up to 23%. It was the biggest crash in living memory. In the US, the Dow Jones fell 22.6%, destroying the previous record one-day fall of 12.8% set during the Wall Street Crash of 28 October, 1929.

However, with the help of central bankers stockmarkets recovered. Five years after the event stockmarkets in the UK, Europe and the US were rising by as much as 15% a year.

What happened?

In October 1987 stockmarkets were in the midst of a five-year bull-run. The global economy had recovered from the recession and stagnation that had blighted the 1970s. Credit was expanding, house prices were rising and investors were in bullish mood. But things were about to turn sour.

A great storm was on its way to cripple the UK. Appropriately enough, Michael Jackson’s Bad was on the verge of topping the US billboards charts. At the cinema Fatal Attraction was a box office smash just as investors’ love affair with the stockmarket, albeit briefly, was about to end. In the space of 24 hours on 19 October, global stockmarkets went into freefall. Yet few could put their finger on the exact reasons why. What can’t be argued with is the fact that there was a collective panic across markets.

Losses were exacerbated by new computerised trading floors that were ill equipped, at the time, to prevent the collapse from spreading. As stockmarkets plunged and investors panicked, central bankers took action: interest rates were cut and the Federal Reserve “encouraged” banks to continue lending to ensure the flow of money wouldn’t dry up. Those policies worked. In the five years following the crash, stockmarkets made a strong recovery.

What can we learn from it now?

While high stock valuations can contribute to a fall they are not necessarily the catalyst. In 1987 there was a more obvious path for investors to take to protect their money. In government bonds they could still find a healthy return as well as the required protection for their investment. Matthew Dobbs, an equities fund manager who was in London at the time of Black Monday and is today Head of Global Small Cap, said: “It is easy to understand why investors might be concerned about investing in stocks now. Stockmarkets continue to reach new highs and equity valuations are similar now to what they were in 1987. But there is big difference today: the risk-free rate is very different. “What I mean is that that the yields on bonds and interest rates in banks, where there are fewer risks to losing your investment, are now very low compared to the dividend yield on the stockmarket, which is around 4%.”

The market blip that was Black Monday

The chart below reflects the fluctuations in the US stockmarket since 1970. It illustrates how Black Monday registered as barely a blip in the long term and how resilient stocks have been over the last 47 years.

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