Making money: what the experts think

Black Monday

To a certain generation of Britons, October 1987 was memorable for two shocking events. First came the great storm that wiped out swathes of ancient woodland. Then, while the country was still recovering, a sudden stock market collapse that wiped out billions from portfolios and retirement funds. That apocalyptic day became known as “Black Monday”, said Simon English in the London Evening Standard. And its 30th anniversary this week is particularly resonant, given today’s toppy markets. “We’ve got shares, bonds and Bitcoin all at record highs. History suggests that, at some point, something will give.”

What happened?

Market veterans in the City and on Wall Street have no shortage of “war stories”, but few compare to the events of 19 October 1987, when US stocks fell more than 20%, said the FT. It was their “biggest-ever” one-day crash. “No two market eras are alike” but, as Rob Arnott of Research Affiliates points out, “there are similarities” with today – “and lots of them”. Then, as now, the atmosphere in the run-up to crash was “heady”. As stocks hit a succession of fresh all-time highs, the same “buy the dips” mentality prevailed. But Black Monday “was not just about valuations”. Indeed, many “saw it as an extreme technical accident”. It was only when investors began resorting to “portfolio insurance” – selling futures to try to limit the damage – that “a rout turned into carnage”.

The next bogeyman

Modern trading controls mean the scale of that slide might never be replicated. And there are other big differences, said Philip Davies on Seekingalpha.com. Today’s highs aren’t being caused by “random market mania” but by “a fairly rational response to low interest rates” and trillions of dollars of QE. Another important factor is that President Trump has increasingly tied his “success” with the performance of the market. But perhaps the main difference between now and 1987 is that ordinary punters are more wary, said the FT. Although the market continues to rally, it has routinely been called “the most hated bull market of all time”. As Tobias Levkovich of Citi Research concludes: “The majority of investors are still reluctant and cautious about where the next bogeyman is coming from.”