Ten years on, will the bull market end in another crash?

On Monday 19 October 1987, stock markets around the world crashed. As the 10th anniversary approaches, Tom Stevenson, Financial Editor, asks whether history will repeat itself.

If you own shares or have a pension and you want a fright, look at the two charts on this page. They superimpose the current bull market on Wall Street on to its two most notorious predecessors, the speculative bubbles that ended so catastrophically in 1929 and 1987. The similarities are, to say the least, worrying.

If you believe that history repeats itself, it is time to run for cover from a crash that will destroy billions of pounds of savings and pensions and couldwreak havoc in the real economy beyond the financial markets. History does not repeat itself, of course, either in the magnitude of events or their timing. Ask half a dozen City professionals what will happen to stock markets over the next year and you will get six different answers. That interplay between fear and greed, pessimism and optimism is what makes for a vibrant market.

But those raw emotions can blind otherwise rational people, as one famous investor, Joe Granville, noted: "Bear markets never come by appointment, ringing your front door by daylight hours. They come like a thief in the night, sneaking in the back door while the public sleeps the slumber of confidence."

If that is true, the growing bullishness on Wall Street should set alarm bells ringing. The ratio of calls to puts for S&P index options, as good a measure of stock market confidence as any, is showing a more worrying proportion of optimists about the future direction of the market to pessimists than at any time this decade.

That chimes with a cynical view of bull markets which suggests that they always go through the same three phases. In the early stage of a stock market rise there is plenty of value around and professional investors pile into underpriced stocks, driving their value up.

Once shares become overpriced on fundamental valuation models, the professionals bail out in anticipation of a correction. It doesn't come, however, because private investors push shares higher. That makes fund managers nervous because they are missing out and they think of a way of getting back into the market without losing face.

They can't admit to their trustees that they got it wrong when they withdrew from the market so they kid themselves it is different this time. The "new paradigm" is invented, usually a tenuous theory about low inflation and technological change, and the professionals return for a final orgy of speculation before it all ends in tears.

We are almost certainly in the final stages of the current bull run. What is unclear is whether this one will end with a bang or a whimper. There are plenty of reasons why a crash might happen - the scale of the rise on Wall Street, rising interest rates, high valuations, a heavy trade deficit and tensions about the US/Japanese exchange rate. But there are equally plausible reasons why it won't.

Some shares are very highly rated, but strip out banks, oils and pharmaceuticals from the index and 1997 has actually been a rather disappointing year on the stock market. Exporters, affected by the strength of sterling, and pretty much any small company, have missed out on the FTSE 100's bonanza.

Although the market is as highly rated as it was in 1987, with shares trading on average at around 20 times earnings and dividend yields low, that is possibly justifiable when low inflation and so interest rates reduce the attractions of other financial assets. Another crucial difference is in the supply of new equity to the market. In 1987 companies were issuing new shares like confetti, while this year there have been hardly any new issues or cash calls.

At the bottom end of the market, directors of companies are buying shares in their own businesses at a faster rate than at any time since the dark days of 1992, just before the pound fell out of the exchange rate mechanism. The prospect of a weaker pound and strengthening European export markets signals good profits growth for smaller exporters.

The way London tracks Wall Street means a fall in the US market will be impossible to shrug off here. But will it turn into a bear market like the slump between April 1972 and December 1974 when shares lost 70 per cent of their value?

Probably not. The crash of 1998 is likely to be a correction of between 10 and 20 per cent followed by fairly rapid recovery. But be warned. It is fashionable to dismiss talk of bear markets but one only has to look at Japan, where shares are still more than 50 per cent below their 1989 peak, to know that the wily bear is still out there. Waiting patiently.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
Powdered colors are displayed for sale at a market ahead of the Holi festival in Bhopal, India
techHere's what you need to know about the riotous occasion
Arts and Entertainment
Larry David and Rosie Perez in ‘Fish in the Dark’
theatreReview: Had Fish in the Dark been penned by a civilian it would have barely got a reading, let alone £10m advance sales
News
Details of the self-cleaning coating were published last night in the journal Science
science
News
Approved Food sell products past their sell-by dates at discounted prices
i100
News
Life-changing: Simone de Beauvoir in 1947, two years before she wrote 'The Second Sex', credited as the starting point of second wave feminism
peopleHer seminal feminist polemic, The Second Sex, has been published in short-form to mark International Women's Day
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.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Guru Careers: Executive Assistant / PA

£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Day In a Page

Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

Homeless Veterans campaign

Donations hit record-breaking £1m target after huge gift from Lloyds Bank
Flight MH370 a year on: Lost without a trace – but the search goes on

Lost without a trace

But, a year on, the search continues for Flight MH370
Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

Germany's spy HQ springs a leak

Thieves break into new €1.5bn complex... to steal taps
International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

Whirlwind wit of Simone de Beauvoir

Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

Confessions of a planespotter

With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
Russia's gulag museum 'makes no mention' of Stalin's atrocities

Russia's gulag museum

Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

The big fresh food con

Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

Virginia Ironside was my landlady

Tim Willis reveals what it's like to live with an agony aunt on call 24/7
Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

Paris Fashion Week 2015

The wit and wisdom of Manish Arora's exercise in high camp
8 best workout DVDs

8 best workout DVDs

If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

Paul Scholes column

I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

From the Azteca to Vicarage Road with a million followers

Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

Khan ready to meet winner of Mayweather v Pacquiao

The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable