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

PROMOTED VIDEO
News
Wayne’s estate faces a claim for alleged copyright breaches
John Wayne's heirs duke it out with university over use of the late film star's nickname
Arts and Entertainment
Celebrated children’s author Allan Ahlberg, best known for Each Peach Pear Plum
books
News
peopleIndian actress known as the 'Grand Old Lady of Bollywood' was 102
News
business
News
Mick Jagger performing at Glastonbury
people
Sport
Germany's Andre Greipel crosses the finish line to win the sixth stage of the Tour de France cycling race over 194 kilometers (120.5 miles) with start in Arras and finish in Reims, France
tour de franceGerman champion achieves sixth Tour stage win in Reims
Extras
indybest
Life and Style
beautyBelgian fan lands L'Oreal campaign after being spotted at World Cup
News
people
Arts and Entertainment
Chocolat author Joanne Harris has spoken about the financial struggles most authors face
books
Arts and Entertainment
filmSir Ian McKellen will play retired detective in new film
Finacial products from our partners
Property search
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

    Technical Support Analyst (C++, Windows, Linux, Perl, Graduate)

    £30000 per annum: Harrington Starr: A global leader in trading platforms and e...

    Junior IT Consultant (SQL, Java, C++, Oracle, Graduate)

    £28000 per annum: Harrington Starr: A fast growing consultancy to the financia...

    Technical Support Analyst (Windows, Linux, Unix, Graduate)

    £30000 per annum: Harrington Starr: Technical Support Analyst - Liverpool Stre...

    Juniper Network Engineer - CCNP / JNCIP / JNCIS / Juniper

    £65000 per annum: Harrington Starr: One of the world's largest privately owned...

    Day In a Page

    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

    Richard III review

    Martin Freeman’s psychotic monarch is big on mockery but wanting in malice
    Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

    Hollywood targets Asian audiences

    The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
    Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

    Grindr founder Joel Simkhai: 'I've found love on my dating app'

    Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
    Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

    Is it time to ditch autocorrect?

    Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
    10 best girls' summer dresses

    Frock chick: 10 best girls' summer dresses

    Get them ready for the holidays with these cool and pretty options 
    Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

    Westminster’s dark secret

    Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
    A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

    A History of the First World War in 100 Moments

    Dulce et decorum est: a life cut short for a poet whose work achieved immortality
    Google tells popular music website to censor album cover art in 'sexually explicit content' ban

    Naked censorship?

    The strange case of Google, the music website and the nudity take-down requests
    Howzat! 8 best cricket bats

    Howzat! 8 best cricket bats

    As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
    Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

    David Luiz falls from leader figure to symbol of national humiliation

    Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil