Wealthy Nations Daily Update - Black Monday

55 years ago today US imposed an embargo on Cuba -- 45 years ago BP discovered Oil in North Sea -- 28 years ago today it was the Black Monday stock crash in 1987.

On this day 28 years ago, on Black Monday as it is now known (or Black Tuesday in Australia and New Zealand due to the time zone difference)  the Dow Jones fell 508 points to close down 22.61% at 1,738.74. Of course it was not only the Dow Jones that was in a tail spin. By the end of the month Hong Kong was down 45.5%, Australia down 41.8%, Spain down 31%, with the FTSE down 26.45%. However by far the worst performing market was New Zealand, which was down 60% from its 1987 all-time high.

What is interesting is the last 3 trading days of the previous week, that although did not actually cause the crash across the globe, it certainly had an effect on market confidence. On Wednesday 14th October 1987 the Dow dropped over 95 points (3.8%), down over 12% from the August all-time high. This caused the markets to become nervous due to the fact that there was a feeling that stocks were overvalued. In August 1987 the Dow Jones had touched an all-time high of over 2700. On Thursday the 15th October 1987 tensions flared up in the Arabian Gulf when Iran hit a US registered supertanker, the Sungai, with an anti-ship missile, doing the same again to the ship Sea Isle City the next morning. Then on the Friday the UK was hit by what has since been named as ‘the Great Storm of 1987’ which knocked out power lines and brought down 15 million trees blocking roads and train lines across country, bringing the UK and a lot of northern Europe to a standstill. Those of us who are a certain age will remember a very famous quote by the weather forecaster Michael Fish!

Now depending on who you talk to there are a number of different opinions as to the cause of the crash. One of the main arguments for the crash was the sudden drying up of liquidity on the buy side. The programme trades that were happening at the time automatically turned off all buying. So all bids vanished at the same time whilst the programmes were trying to sell. This is still one of the major concerns with regards to the exchange traded funds (ETF) especially in the US. These can work well in normal circumstances however in times of stress the underlying market can struggle for liquidity which has a knock on effect on the ETF. By way of example the world’s biggest EFT has got too big for the market it was designed to track and has closed its doors to new subscriptions. The Next Funds Nikkei 225 Leveraged Index ETF, which relies on the Nikkei futures market, has said the liquidity in the underlying market is not deep enough to facilitate any new subscriptions.