Three decades since Black Monday – are markets on the verge of another tumble?

A businessman covers his face as the market crashes on October 19, 1987 
On October 19 1987 US stocks fell more than 22pc, in the biggest one-day crash ever recorded

When Christopher Godding landed his first job as a fund manager in 1987, he had no idea that he was about to witness the biggest one-day stock market collapse in history.

On October 19, just two months into his role, US stocks fell more than 22pc – the biggest one-day crash ever recorded, with London’s FTSE 100 plunging 11pc in a day now infamously known as Black Monday. With the worst storm to hit the UK since 1703 also battering through the country that week, it was a time few have forgotten. 

"Everything on my screen just went red," recalls Godding, who was on the US equity desk of Kleinwort Benson at the time and is now Tilney’s chief investment officer. "The lesson for me from [that day] was that things can bounce back very quickly, and so the thing to do is do nothing. Being forced to do something in a time of stress is the worst you can do." 

It's a lesson he has carried with him his entire career, keeping the memory close during the financial crisis when fearful clients were eager to liquidate their entire portfolios. "Most people become very protective of their wealth – they don't mind that they're selling at the bottom, they just want to sell what's left," he said. "It's a natural instinct." 

For many others, the unexpected fall exposed a weakness they had never expected to see (and stock exchanges have since put in place so-called 'circuit breakers' to halt trading in the event of dramatic drops). 

"That day for the first time in my professional life I witnessed the effect of our inability to monitor, manage and control leverage in the banking industry – and the impact it had on the real economy," reminisces Xavier Rolet, the boss of the London Stock Exchange who was working at Goldman Sachs in New York at the time. 

Xavier Rolet says of Black Monday: 'That day for the first time in my professional life I witnessed the effect of our inability to monitor, manage and control leverage in the banking industry – and the impact it had on the real economy'
Xavier Rolet says Black Monday was the first day of his professional life that he witnessed 'the effect of our inability to monitor, manage and control leverage in the banking industry – and the impact it had on the real economy'   

The exact reason for the dive has never been identified (and in the year running up to Oct 16 1987, three days before Black Monday, the FTSE 100 returned 49pc to investors), though the finger has often been pointed at newly introduced computer trading, which is thought to have exacerbated selling and drove prices lower. 

Thirty years on, and market observers are scouring the landscape for red flags. Vanguard chairman Bill McNabb sounded a warning on Tuesday after US stocks closed at a new high, days after the FTSE 100 smashed another record, telling the BBC's Today programme that he expects "a decent-sized correction at some point". 

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How the Daily Telegraph reported Black Monday, the following day

It is a message echoed by Hermes' head of investment Eoin Murray, who predicts a "correction of some sort in the next 18 months to two years" although admits it is tough to predict the size. Investment managers are being increasingly judged on short-term performance which is feeding into modern trading behaviour and creating more risk, he adds.

Looking back, Mr Murray remembers colleagues still talking about Black Monday three years after the event. "They thought they had a reasonably fool proof system," he recalls, noting that it is now his job to be perpetually concerned.

But there have of course been significant improvements since 1987 – the banking system has become more resilient, regulation is more rigorous, there is more public disclosure of information and controls have been put in place to stop huge trading falls. 

"I don't want to sound complacent but the overarching investment market is better regulated and managed then it was," said Aegon investment director Nick Dixon, adding that central banks are also a lot better at communicating potential changes. "Having said all of that, assets are richly valued at the moment. [There's] been very strong equity market growth in the last five years – that will not be repeated in the next five.

"While I wouldn't predict a massive downturn I would say the risk of value bleeding over time is heightened, so people need to be more cautious."   

Although there are controls in place that weren't there in 1987, many who look back on Black Monday point to the sense of blind panic that rippled through the markets. 

"As long as human emotion has some place to play in setting prices there will be violent corrections in the future," said IG Group's head of UK Ian Peacock. 

"The flash crash of 2010 was a trading error, but it wiped nearly 1,000 points off the Dow Jones and could easily have led to something more serious. Nowadays traders have 24 hour market access and large overnight orders in relatively illiquid markets can lead to substantial price moves." 

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