Happy birthday Black Monday!

Thirteen years ago this week the London stock market suffered what has gone down in the City history books as Black Monday. The market correction that took place during the days following 19 October 1987 was savage and worldwide. The effects it had were considerable. Chancellor Nigel Lawson eased monetary policy and this, combined with the ill-judged warning of the ending of mortgage interest tax relief on joint borrowers, helped fuel a period of double-digit inflation.

Thirteen years ago this week the London stock market suffered what has gone down in the City history books as Black Monday. The market correction that took place during the days following 19 October 1987 was savage and worldwide. The effects it had were considerable. Chancellor Nigel Lawson eased monetary policy and this, combined with the ill-judged warning of the ending of mortgage interest tax relief on joint borrowers, helped fuel a period of double-digit inflation.

There is a temptation every year to reflect on the anniversary of a period when even professional investors, hypnotised by the sea of red on their trading screens, felt impotent. This year it seems singularly appropriate given the turmoil that has hit markets in recent weeks. What is more, there are some common strands.

In October 1986 Big Bang, as deregulation of the stock exchange became known, unleashed an unprecedented wave of activity in the stock market. For institutional investors commissions were slashed, while they gained direct access to the jobbing system, as market makers were then known, for the first time.

Buoyed by a prosperous America, share values started to climb as 1987 matured, peaking in the late summer. The pull back that took place as the nights lengthened seemed no more than a natural correction in a bull market. Until the middle of October, that is.

The situation in London was exacerbated by the hurricane in south-east England during the night of Thursday 15 October. Such was the disruption caused by downed power lines and blocked roads and railways, that the London stock market did not operate that Friday for the first time that anyone could remember. When America went into freefall during the afternoon, there was no way in which London could absorb the turmoil across the Atlantic. It was all crammed into the following Monday - and the situation worsened significantly when Wall Street opened and the fall steepened.

Many people blame the severity of the correction on the burgeoning derivatives markets. Certainly, strains between cash and futures markets became apparent, leading to changes in working practices to prevent similar problems. The inability of systems to reconcile the positions between markets led to the closure of the Hong Kong Stock Exchange for a week. It was that serious. You had to be there to experience the fear present among those who earned their living from financial markets.

With the benefit of hindsight we could see that the market had simply become over optimistic as 1987 unfolded - much in the same way that new economy stocks were ramped by eager investors during a six-month period that began not much more than a year ago. If you ignore 1987 in stock market terms when looking at the chart of equity market performance, then you can see that the longer term pattern looked quite stable. That year was an aberration - both on the way up and the way down.

I conducted a similar exercise on the NASDAQ Index recently, taking out around eight months of Index performance that included the rush up to the peak in early March and subsequent sharp correction. It looked very similar to 1987. Unfortunately, more old ghosts have come to haunt us as we reach this momentous anniversary, with the Middle East in turmoil, the oil price rising and the true valuation of technology stocks still a matter of considerable conjecture.

Traditionally, the closing weeks of the year are a good time for stock markets. Institutional fund managers endeavour to balance their books as 31 December approaches, while anticipation of a flow of money into Personal Pension Plans in the US leads mutual funds to be quietly acquisitive.

This year should be no different, oil and the Middle East excepted. It is worth remembering the words of the original Nathan Meyer Rothschild: "Buy when the cannons are thundering, sell when the violins are playing." It takes courage to do that, just as you would have needed to be very brave to buy in the closing weeks of 1987. And what a successful strategy that would have been.

Brian Tora is chairman of the Greig Middleton Asset Allocation Committee

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

    The 161-page dossier that exposes Fifa's dark heart

    How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
    Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

    Exclusive interview with Tripoli PM Khalifa al-Ghweil

    'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
    Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

    Raymond Chandler's Los Angeles

    How the author foretold the Californian water crisis
    Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

    Art attack

    Chinese artist who posted funny image of President Xi Jinping facing five years in prison
    Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

    Cher is the new face of Marc Jacobs

    Alexander Fury explains why designers are turning to august stars to front their lines
    Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

    'I'm climbing Ben Nevis for my daughter'

    Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
    10 best wedding gift ideas

    It's that time of year again... 10 best wedding gift ideas

    Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
    Paul Scholes column: With the Premier League over for another year, here are my end of season awards

    Paul Scholes column

    With the Premier League over for another year, here are my end of season awards
    Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

    Liverpool have seen too much tragedy to forget Heysel

    Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
    Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

    Khan’s audition for Mayweather may turn into a no-win situation

    The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor