1987 remembered

The weathermen predict a storm this weekend; comparisons are being made between this storm threat and the storm we experienced in October 1987. We also have similar ecological conditions now as was the case in 1987, the ground was wet and the trees still had ample foliage. The storm in 1987 was made more famous in England as the prelude to a stock market crash. I was a young trader at the time, and despite being nearly 30 years ago I remember the day well. What I did not remember was that the FTSE 100 had risen over 40% that year leading up to the crash (it makes our 14% this year so far look modest). All of that gain in 1987 was lost in days. I do remember the Warburg strategist warning us in the weeks before that the gap between equity market valuations and those of other assets, in particular gilts were very stretched. Not many took much notice, one thankful exception was our head of trading who positioned us well for the day. One particular memory I have as we finished the day counting our losses, one of the senior traders insisted everyone went to the local bar and drank champagne. His rational "anyone can drink champagne in a bull market". 

The early and mid 80s was a great time to be involved in the stock market as markets rose nearly as fast as salaries. Making money was easy, fear was non existent and greed was abundant, particularly by 1987. It felt like what ever you bought you could sell for more the next day. I think that is why the fall when it happened had a greater impact on us. On the Friday night after the storm, and long after we had gone home, the DJII fell 100 points, a fall of about 4%. By today's standards not unusual but in those days we had not seen anything like it. Over the weekend ahead of "black Monday"(as it became known), one was not sure what was going to happen when the markets reopened; we just knew that it was not going to be good. At the time the crash felt catastrophic, but in comparison to 2007 it was a mere blip. The fall was over in a few days and the stock market then embarked on a more sustainable recovery, but it took nearly 4 years to get back to the level achieved in the August of that year. Not that it felt like that at a time but it was a great opportunity to invest in the stock market.

The reliance on technical trading has grown in the years between 1987 and today, and at the time the market must have looked very overbought, but it must have looked like that for quite sometime ahead of the fall. A salient warning to those who use technical tools to trade, as Warren Buffet reminds us "markets can stay irrational longer than we can stay solvent". Earnings that year had not risen in line with the move in the stock market and valuations became stretched. Unlike then, today equity valuations still look attractive in particular relative to gilts.

Markets have risen sharply this year but not by the amounts in 1987, but like 1987 performance has outstripped earnings growth. Hopefully this storm will not lead to another 1987 style crash, but painful though it will be, if it did I think one will have to remember 1987 and what a great opportunity it provided.

Posted on October 27, 2013 .