On this day 30 years ago, Black Monday as it is now known (or Black Tuesday in Australia and New Zealand due to the time zone difference) saw the Dow Jones fall 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, which did not actually cause the crash across the globe, 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’ 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.
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. Although today’s markets are more sophisticated, there are still elements of the market that are largely untested in highly volatile markets. This is still one of the major concerns with regards to the exchange traded funds (ETF) especially in the US. These now control more than USD4tn of assets.- they potentially 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, exacerbating market losses.
Another big worry for some is that fact that there is no central marketplace anymore. With the market now operated by 12 registered national exchanges, approximately 40 dealer/broker operated trading venues, countless day traders and other trading systems; the market is so much more fragmented than it was. Laszlo Birinyi, the founder of Birinyi Associates, who was in the midst of Black Monday at Salomon's back in the day recently warned, ‘My greatest concern is the lack of a central marketplace’. Recalling events at the time, he went on to say, ‘Back then it was gut-wrenching, but we could see what was happening. What concerns me today is that a lot of the time we can’t see what’s happening. There are so many venues and the reporting is so much more difficult. We don’t know what’s going on in dark pools or in internal trading desks.’
So, are we going to see a repeat anytime soon?? US equities have been on an multi-year bull run, money has been cheap, there are asset bubbles globally, North Korea, Brexit, Italian Banks, Greek debt, the rise in populism, consumer debt, the leader of the free world, US & Trump relationships with not only its enemies but also its friends, trade wars / protectionism, the VIX at historical lows, possibly a new Fed Chair, the unwinding of QE, China’s ‘New era of global power’, climate change, job killing automation, inflation killing Amazon, and as mentioned, the depth of underlying liquidity. There are enough sparks; it only takes one to catch!!