Share Prices & Company Research


18 October 2017

Black Monday: After the storm …

In a moment that has gone down in weather forecasting history, Michael Fish reassured the nation that a hurricane was not on its way before the Great Storm hit the UK, devastating parts of the South of England.
Three days later, turbulence of a different kind hit financial markets on 19th October 1987, a day that came to be known as Black Monday.

Like the weather forecasts, the markets of the preceding summer could also be accused of giving misleading signals. The FTSE 100 and the Dow Jones had experienced a five-year bull run, driven by various factors including low interest rates, takeovers and mergers. The UK stock market had risen by 47 per cent between the start of 1987 to the middle of July. That August, the Dow peaked at 44 per cent over the previous year's closing of 1895 points. There were suspicions that a stock market bubble was forming, with valuations becoming more and more stretched. Investor confidence was high, with the belief that share prices would continue to go up.
Meanwhile, the privatisation boom was in full swing, with many people, for the first time, being offered the chance to get their hands on shares in companies such as British Telecom and British Gas.

At the time, Eric Spreng managed the back office of a small stockbroking firm in Edinburgh. He said: “It had been so busy in the months leading up to it, markets went up and up.

“Before the crash, we had the privatisations of BAA, Rolls-Royce, British Airways… we would finish one privatisation when another one came along.”

At Redmayne-Bentley, it was a similar story. Stockbroker Rachel Mallinson, who joined the firm in 1984, said: “In the run-up to Black Monday, the privatisations meant we were really busy.”

In mid-October 1987, an unsettled mood had begun as Iran fired a missile at an American-owned supertanker in the Gulf.

On Wednesday 14th October, the Dow Jones Industrial Average (DIJA) fell 95.46 points (a then record) to 2412.70, before dropping another 58 points the following Thursday, down over 12 per cent from August‘s all-time high.

On the night of Thursday, 15th October, the Great Storm brought London to a standstill as traders were unable to get into work in the City. Staff in Redmayne-Bentley’s Leeds offices had to rely on market makers, who quoted the buy and sell prices of stocks, in Glasgow, Birmingham and Bristol.

Rachel said: “Nobody could get into work in London, so it was bedlam up here.”

As Monday dawned, the crisis began to spread from the Far East as markets in Hong Kong and Tokyo crashed. The fall accelerated in London time, made worse by Friday’s storm, with the FTSE 100 falling more than 135 points in early morning trading. Sell orders came rushing in as investors tried to cash in on the profits they had made earlier that year.

Tim Whitehead, who had been with Redmayne-Bentley for around a year before the events unfolded, said: “The markets started to fall, and kept on falling. We had screens that gave the prices, and they were just completely red all day.”

There was renewed panic when Wall Street opened on the Monday afternoon, again, well down on the previous day’s close.
Investors continued to sell the following day. Rachel said: “It was frightening. It was the adrenaline that kept us going. We didn’t have lunch breaks, we couldn’t. The phone was ringing constantly with everyone wanting to sell.

Trading recovered slightly on the following Wednesday, but markets remained weak for the rest of the month, with the FTSE 100 down more than 25 per cent on the start of the month.
Eric, now an investment manager in Redmayne-Bentley’s Perth office, describes the period after the storm as “a ghost town.”

He added: “In summer 1987, there was a fantastic atmosphere. Six months on, there were no phones ringing. After the crash happened, orders dried up, and we went from 100 orders a day to 20.
“It was a long 12 months before it started to pick up. In a way it was a blessing, as it helped us clear a backlog of work created by the privatisations.

“Everyone was shell-shocked and there was disbelief. That’s the main emotion I remember.”
Despite the sombre mood that took over in the aftermath of Black Monday, the market did go on to recover as sharp falls in interest rates and more realistic valuations tempted investors to return. In fact, the FTSE 100 ended 1987 higher than it began.

Tim believes it is unlikely there will be an incident similar to this one. He said: “We would need to see the Dow Jones drop by somewhere in the order of 4000 points during the day.
“Technology was so antiquated in 1987, information filtered out far more slowly, and access to price information was inferior to what it is now.
“That said, it could arguably be far worse this time if we were to have a crash, because so much trading is undertaken by computer programmes and there’s no human intervention now. It could potentially become more globally contagious far more quickly.
“If there are any similarities between then and now, it would be the Iran situation and the North Korean situation we face today, but we’re not seeing any compelling evidence that investors think markets are heading for a serious rerating.

“Crashes have historically been blips when you look at long-term track records of markets. It becomes more of a problem if you look at periods like the 70s, when you had constant periods of steadily falling markets where nobody thinks there is a chance of recovery and the outlook is bleak.

“The Vix index, which measures the market’s expectation of volatility, is exceptionally low at the moment. A number of commentators think it’s due for a spike-up but I can’t see what it would take for that to happen. I view it as an opportunity to follow the words of Warren Buffet and ‘try to be fearful when others are greedy and greedy only where others are fearful.’”
Black Monday: After the storm …
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