Black Monday: 30 years on from the 1987 crash

Today marks 30 years since what is still thought of as the worst day in UK stock market history, Black Monday.

The anniversary falls at at a sensitive time, when investors are expressing concerns about the long-run bull market that has pushed up valuations in both share and bond prices, and whether a correction is on the way.

If another crash does occur, investors will hope it’s not on the scale seen on 19 October 1987. On this day, the FTSE 100 plunged 10.8% and the S&P 500 plummeted 20.5%.

The crash was blamed on automatic trading programmes, as traders relied on selling stocks as they fell in order to limit losses on their portfolios. This started a vicious circle as selling pressure caused shares to fall which prompted more selling, sending markets into a downward spiral.

Markets haven’t seen a crash quite as bad since. Although the 2008 financial crisis was worse, with the UK stock market plunging 30% that year, its biggest daily falls did not match the severity of Black Monday: the worst on 10 October 2008 saw the FTSE 100 drop 9% and on 15 October 2008 the S&P 500 fell by a similar amount.

The losses incurred in 1987 were so great that circuit breakers were introduced afterwards to halt panic and automated selling, said Justin Urquhart Stewart, co-founder of Seven Investment Management.

However, James Bateman, chief investment officer of multi-asset at Fidelity International, said programmatic or rules-based trading had been blamed for other crashes, including the 2010 flash crash that saw 6% wiped off the S&P 500 in just 20 minutes.

And the next time it could be worse as today there are far more 'quants', or investors applying mathematical methods to identify small market opportunities they can quickly exploit.

‘Since 1987, quants have almost doubled their share of all US stocks trades from 13% to 27% in 2017, potentially increasing the chances of a quant-driven crash in markets,’ he said.

There are many comparisons to be made between now and the period before Black Monday. Markets at the time were in the midst of a five-year bull-run that had taken equity valuations to record highs, the global economy had recovered from the recession of the 1970s, credit was booming, housing prices were going up, and there was even a great storm on the way.

The problem was no one saw the crash coming and few could put their finger on why it happened. Rising inflation and concerns about an economic downturn, and fears of rising interest rates all played their part, as well as political tension between Iran and the US.

It all sounds familiar.

Matthew Dobbs, who heads Schroders' global small companies team and runs the Schroder Asia Pacific (SDP ) investment trust, remembers the day well. He said while there are similarities between then and now, there is one key difference - today investors have been forced into stock markets.

‘It is easy to understand why investors might be concerned about investing in stocks now,’ he said. ‘Stockmarkets continue to reach new highs and equity valuations are similar now to what they were in 1987. But there is a big difference today: the risk-free rate is very different.

‘The yield on bonds and interest rates in bank, where there are fewer risks to losing your investment, are now low compared to the dividend yield on the stock market, which is around 4%.’

He said this has pushed investors into the stock market for returns as they are receiving next to nothing on bank deposits and bonds.

‘Despite that, I still don’t think too much money is going into stock markets,’ he said. ‘People are cautious towards stocks because of what happened during the global financial crisis of 2007 and 2008. Although it was 10 years ago, it still feels like it happened quite recently.’

Was it really that bad?

While it may have felt like a stockalypse at the time, markets soon bounced back and actually ended 1987 higher than they started.

Research by Fidelity International shows that £1,000 invested in the FTSE 100 on the Friday before Black Monday would now be worth £3,151.

Tom Stevenson, investment director for personal investing at Fidelity, said anyone looking back at the 1987 crash today ‘might wonder what all the fuss was about’.

‘Those few days in October 1987 now seem like no more than a stumble in the market’s relentless long-term rise,’ he said.

‘Even the unluckiest investors, one who invested just before the crash, would still have made positive returns over the long term. This should afford some relief to growing investor concerns that we are heading for a market correction in the near future.

‘A buy-and-hold strategy can make even the most volatile markets look like a steadily rising elevator in the long run.’

Bateman said the worst monthly drawdowns over the past 40 years have usually been followed by strong returns.

‘On average, investors can earn around 7% per annum from equities,’ he said. ‘However, lessons can still be learnt and areas of caution going forward are warranted. Black Monday highlighted how important market structure is. With this in mind, low volatility strategies may be a cause for concern, crowding into low volatility stocks, only to suffer losses when volatility rises.’

Investors cannot always avoid losses but ensuring you are diversified across different markets can limit the impact of a downturn, he said.

Looking ahead, Bateman said financial stocks looked attractively valued given they tend to benefit from rises in interest rates, which the US has embarked on with the UK likely to follow.

Ben Kumar, investment manager at Seven Investment Management, said although technology stocks play a big part in our lives and in investment portfolios, more traditional US companies offered more growth in his view.

‘Giants like Apple and Amazon are now firmly embedded in our lives, and may struggle to deliver growth in the same way as they have in the past few years, particularly as their areas of competition begin to overlap,’ he said.