Black Monday crash of 1987 shows few parallels with today’s equity markets

Fund manager Schroders has looked back at the events of Black Monday, October 19th, 1987, when global stocks markets fell by up to 23%, and the lessons to be learnt from it.

Black Monday was the biggest market crash in living memory, with the US Dow Jones index falling 22.6% compared to the previous record of 12.8% in the Wall Street Crash in 1929. But markets recovered, with the support of central banks, leading to stock market growth rates of around 15% a year within a few years.

Two Schroders managers who worked through Black Monday commented on parallels to the present. Matthew Dobbs, now head of global small-cap and an equities manager 30 years ago, said: “Stock markets continue to reach new highs and equity valuations are similar now to what they were in 1987. But there is big difference today: the risk-free rate is very different. What I mean is that the yields on bonds and interest rates in banks, where there are fewer risks to losing your investment, are now very low compared to the dividend yield on the stock market, which is around 4%.”

Andrew Rose, an equities fund manager, commented: “We hadn’t seen anything like the performance in stock prices before and we haven’t seen anything like it since. And it coincided with one of the greatest storms [The Great Storm of 1987] the UK has ever seen, which bizarrely ended up contributing to market falls. The storm happened on the Thursday night before Black Monday. There was hardly anyone in the Schroders’ London office on the Friday or anywhere in the City. With markets closed it meant that investors had to carry their positions throughout the weekend because they couldn’t square them on the Friday. But traders had bought portfolio insurance – a mechanism that automatically sold investments into a market when the price hit a certain level.”

“Investors thought it was a free lunch and losses would be limited. But everyone was a seller and no one was a buyer when markets went into freefall on Monday morning. The automated mechanism of selling at a certain price failed. In fact, it exacerbated the issue. Ironically, if they hadn’t taken out this sort of insurance then markets might never have fallen as much as they did.” Dobbs added: “At the time you felt it was the end of the world, but looking back it was just a blip. The UK and the US stockmarkets rebounded strongly in the late 80s and throughout the 90s.”