I remember the 1987 crash well. Not as a market participant - I was still in my post-graduation see-the-world phase then - but I did have a front row seat of sorts.
When markets tumbled on October 19 1987 I was visiting a broker friend in Hong Kong. We had more time together than we expected because Hong Kong’s response to the crash was to pull down the shutters and take the phone off the hook. The Hong Kong market effectively closed down for a week, raising legitimate questions about its status as a global financial centre.
Back in London, the shut-down actually preceded the crash. On the Friday before Black Monday markets were closed, not because no-one wanted to trade but because they couldn’t get to their desks. The great storm, famously not predicted by weatherman Michael Fish, had turned the City into a kind of financial Marie Celeste.
The extended weekend was one reason put forward for the scale of the carnage on the following Monday - investors had had three days to stew over the previous week’s volatility and the geo-political worries triggered by Iran’s missile strike on an American-owned super-tanker in the Gulf.
The real reason, however, was more likely the then nascent computerisation of financial markets and specifically the growing use of so-called program trades. These were automated orders designed to help investors protect their portfolios against volatility but, in all likelihood, doing precisely the opposite.
When you think about it, a system that triggered an avalanche of sell orders on the back of market weakness was never going to be a good idea.
When markets did open in Asia after the weekend, indices immediately fell sharply. The rout deepened in European trading after the US retaliated to the previous week’s missile strike. By the time New York opened, markets were in a full-blown panic. The Dow Jones Industrials index fell by 22.6%, its worst one-day fall ever, deeper even than the 1929 Wall Street crash.
What is less well-known is the fact that the 1987 crash was, with the benefit of hindsight, no more than a particularly savage market correction. It didn’t trigger an extended bear market. It didn’t even cause much real economic damage.
By the end of 1987, most major markets were already higher than they had started the year. The Dow Jones had recovered its pre-crash high by early 1989. From the perspective of 2017, it is quite hard to even see the 1987 crash on a market chart. It really was just a blip in the relentless rise of the market in the post-war era.
Even if you had had the misfortune to invest in the market just before the crash, time has been a great healer. Our research shows that if you had put £1,000 in the Dow on the Friday before the crash you would now be sitting on £12,000. Germany’s DAX would have turned your £1,000 into more than £10,000. The FTSE 100, which has underperformed these markets, would have trebled your money. Even the Japanese market, which peaked only a couple of years after the 1987 crash, has broken even over the 30 years.
Perhaps unsurprisingly, some investors look at the market today and draw worrying parallels with 1987. Are they right to do so?
Certainly, there are some similarities. As was the case 30 years ago, markets have been rising for quite a few years and valuations are high. The portfolio management program trades of 1987 are mirrored in some ways by today’s low volatility trading strategies which automatically withdraw funds in the event of an intensification of the market’s gyrations. The US is sabre-rattling again, notably with Iran. And let’s not forget the storm that blew through Ireland earlier this week!
But there are plenty of reasons to be a bit more relaxed. First of all, some important lessons were learned from the catastrophic falls in October 1987. Automatic circuit breakers are in place to give investors a breather if markets go into freefall. Information flows are much better than they were so investors are less likely to be blindsided by events on the other side of the world.
Perhaps most importantly, the market and economic backdrop is very different today. Interest rates are on the floor which means there is much less incentive for investors to abandon the stock market and move into higher yielding bonds, as there was in 1987. Also, the optimism which pervaded markets in the 1980s, in the midst of the Thatcherite revolution and following the City’s Big Bang, is notable for its absence. This has been a most grudging bull market so there is really very little froth to blow away.
Mark Twain famously said that history doesn’t always repeat itself but it does sometimes rhyme. What he didn’t say but might have is that sometimes it neither repeats nor rhymes. Yes, the stock market might be due a correction but there is no reason to fear a re-run of the 1987 crash. Sometimes it really is different this time.
I will be speaking about the outlook for markets at the London Investor Show on Friday. Fidelity International is sponsoring the show and you will be most welcome at our stand on the day. Alternatively, you can catch up with my thoughts on the likelihood of a correction, how much cash to hold in today’s market environment and other key investment questions in our latest Investment Outlook report and webcast.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.