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

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