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; request a free guide on NISAs from Hargreaves Lansdown

Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
News
Billie Whitelaw was best known for her close collaboration with playwright Samuel Beckett, here performing in a Beckett Trilogy at The Riverside Studios, Hammersmith
people'Omen' star was best known for stage work with Samuel Beckett
PROMOTED VIDEO
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

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'