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Black Monday – 25 Years On Thursday, October 25, 2012 The Times Business I 11 Stock Market Review Black Monday – 25 years on Edward Rizzo Mr Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd. he international stock market crash of 1987, or “Black Mon - day” as it is referred to in the financial world, was the largest one-day decline in the history of the stock market. The Dow TJones in the US declined by an astonishing 22.6 per cent in just one day – Monday, October 19, 1987. In the UK, the FTSE 100 plummeted 11 per cent that day and a further 12.2 per cent the following day. It has been 25 years but that financial meltdown still continues to grab the headlines of major financial journals in view of the extent of the crash that sent shock waves around the world. To try to analyse the reasons behind the steep decline, one would need to understand the economic backdrop and the performance of the major stock markets in previous years. ago and point to an incident in the Persian the losses will be crystallised once the sale of their shares were amply rewarded. The same A bull market had started way back in 1982 Gulf as a determining factor when two US war - an investment takes place. The same recovery holds true for many other blue chip compa - fuelled by a low interest rate environment, a ships had attacked an Iranian oil platform. pattern was also evident in late 2008 and early nies listed on the main international stock succession of takeovers and mergers, and a Equity markets are normally vulnerable to a 2009. Maintaining calm is much easier exchanges. Apple shares today, four years after multitude of new initial public offerings. All sharp setback when several incidents threaten said than done, and with most investors nor - the latest downturn, are trading at around were very successful with numerous investors to take place concurrently. Investor concerns mally shocked at a crash, few take immediate $620 having hit a high of $705 quite recently. seeking to get hold of minority stakes in vari - on fears of a war breakout and the other fac - action to accumulate shares that would have To take advantage of such situations, ous new public companies, including privati - tors at play at the time led to the buildup of the fallen rapidly. investors should maintain some readily avail - sations of large well-known government- stock market crash in October 1987. Ideally investors should wait for markets to able cash to fund an acquisition of shares owned companies, especially in the UK. Black Monday actually started early morn - calm down before deciding on any further when unexpected price declines occur. Investor sentiment was generally euphoric ing in Hong Kong, spreading quickly to Europe action. Investors who panicked and sold out Moreover, it is also important for investors leading to strong gains in equities in 1986 and as the markets opened, and likewise in the US amid the downturn must have remained very to be aware of companies which could be 1987. In 1986, the FTSE 100 in the UK had as the Wall Street opening bell rang. On the disappointed over the years after having worth including in their investment portfolio advanced by 19 per cent while in the first nine day, the Dow Jones Industrial Average col - missed out on the strong recovery in the equity given their interesting longer-term outlook. months of 1987, the UK benchmark index had lapsed by 22.6 per cent and the markets in markets since then. Such a watch list would help investors act already rallied by a further 37 per cent before Hong Kong and Australia lost more than 40 Another lesson to remember from the crash swiftly when setbacks take place and avoid the market crash. per cent. Share prices in nearly every country of 1987 and the more recent downturn of rash decisions which may not have been suf - Similarly, the Dow Jones in the US had worldwide plunged in a similar fashion as 2008-9, is that investors should take a long- ficiently researched amid the panic. climbed by 44 per cent reaching its highest panic selling was the order of the day. term perspective when taking an exposure to A widely held view among many value level in August 1987. An interesting indicator shares. The 1987 crash looks insignificant on investors is that one should avoid investing showing the extent of the sharp rally is that at a long-term chart today even though the huge based on emotions and common beliefs. Con - the time of the market peak in the summer of “The 1987 crash looks fall in values must have been hard to digest at trary to conventional spending patterns, retail 1987, dividend yields on equities were only the time. Similarly, markets recovered fairly investors tend to favour shares when approximately one-third of the yields on insignificant on a long- quickly from the initial reaction to the bank - prices are rallying and shun them when prices bonds. The opposite holds true today with term chart today” ruptcy of Lehman Brothers in September 2008 are falling. yields on certain equities above the returns although the ensuing international financial Investors should behave in the opposite provided by bonds as the sharp declines in crisis gripped world economies in a much manner and look favourably towards an interest rates and resultant higher bond prices more severe fashion than in 1987. investment when prices are low as opposed to have led to very low returns on bonds. Is it now The Federal Reserve intervened to prevent This setback will probably also be seen as a when prices are peaking. likely that the bond market is about to crash an even greater crisis unfolding. Alan largely insignificant downturn in 20 years’ This is one of the key investment practices rather than the equity market? Greenspan, who had taken up his post as time. Share prices generally reflect a commonly used by some of the world’s Back in 1987, the high rate of economic chairman of the Fed only two months earlier, company’s fundamentals, hence irrational renowned long-term investors like Warren growth in the US economy led to inflationary lowered interest rates and promised to save market behaviour caused by such Buffett. His article “Buy American: I Am” pub - concerns and overheating in various sectors of any US institution suffering liquidity problems incidents create attractive opportunities for lished on October 16, 2008, when markets the economy. To prevent higher inflation and to counteract a potential recession and bank - seasoned investors. crashed following Lehman’s bankruptcy ini - to protect the value of the US Dollar which had ing crisis. After hitting their lowest levels in Few readers recollect that as all company tially drew lots of criticism since the markets been on a steady decline, the Federal Reserve November, markets recovered rather quickly shares declined rapidly in 2008-9, the share had continued to decline until March 2009. raised interest rates in rapid succession. from the crash as companies started buying price of Apple Inc had dropped from the However, with hindsight, Mr Buffett was yet This dampened investor enthusiasm and back their own shares following the sharp falls peak of $200 in late 2007 to almost $80 in again on the right side of the trade with strong created tension among other G7 members in prices. October 2008. capital appreciation in just a few years. leading to a 17 per cent decline in the Dow A sequence of interest rate cuts brought After recovering slightly by the end of that The crash of October 1987 was basically the Jones from its August peak. Moreover, a few relief to the markets. Within two years, the year, this level was reached again in early 2009. result of a stock market bubble created over days before Black Monday, data in the US indi - FTSE 100 had regained its pre-crash level. This However, by the end of 2009, the share price many years. All bubbles eventually burst caus - cated that economic growth was softening and is possibly one of the major lessons that of Apple had surpassed the $200 level and has ing a black day on the stock market. this led to renewed caution among investors. investors ought to bear in mind from such an risen steadily since then. Clearly, investors However, such events could have a silver Some market followers recently com - incident. Investors should not panic when who panicked in 2008 and sold their shares lining as they throw out opportunities for mented about their experiences of 25 years such a widespread downturn takes place since lost heavily, whereas those who held on to brave and contrarian investors. Rizzo, Farrugia & Co. (Stockbrokers) Ltd, not to be construed as a solicitation or an report, other employees or RFC on behalf accept any liability for any loss or dam - RFC , is a member of the Malta Stock offer to buy or sell any securities or of its clients, have holdings in the securi - age arising out of the use of all or any part Exchange and licensed by the Malta related financial instruments. ties herein mentioned and may at any thereof and no representation or war - Financial Services Authority. This report The author and other relevant persons time make purchases and/or sales in ranty is provided in respect of the relia - has been prepared in accordance with may not trade in the securities to which them as principal or agent. Stock markets bility of the information contained in this legal requirements.
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