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Black Monday … 30 years on

Those of us who are of a mature (but now very wise) age may remember the biggest one-day stock market drop in Wall Street history, 19 October 1987, better known as “Black Monday”.

Markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin.

The Dow Jones industrial average plummeted by a record 508 points, registering a percentage drop of 22.5%. In London the value of quoted shares fell by £50bn. The FTSE index also crashed more than 300 points with a loss of £63bn. Dealers marked prices down in an effort to discourage sellers amid scenes close to hysteria.

By the end of October, stock markets in Australia had fallen by 41.8%, Hong Kong 45.8% and the United Kingdom 26.4%.

But the effects of the crash were not as crippling as expected because it was not followed by a depression. The historic meltdown followed a period of big gains for stocks. Over the next decade interest rates went down and investors showed new faith in the market. The debate over the cause of the crash continued for many years after the event but economists have never been able to name a single factor that ushered in Black Monday.

The Dow is currently trading at an all-time high and enjoying a bull run that began nearly nine years ago.

But memories of that dark day in 1987 are a reminder that no market is crash-proof.

What would it take to spark a replay of the 1987 stock market crash?

You can’t blame investors who fear another out-of-the blue shock for wondering.

The general thinking is that the next big market meltdown could be caused by some sort of computer-driven event in a market dominated by machines.

Possible crash scenarios include a computer trading algorithm gone wild, a cyberattack against a stock exchange, bank or market pricing system or a trading systems malfunction that undermines investor confidence in the financial system.

After Black Monday, regulators worldwide developed new rules, known as circuit breakers, allowing exchanges to temporarily halt trading in instances of exceptionally large price declines in some indexes. Only one market-wide halt has been triggered since then, in 1997.

Whilst being aware of tech-driven vulnerabilities in today’s market, most analysts don’t see stocks as nearly as vulnerable from a business and economic standpoint as they were in the days leading up to the 1987 crash.

Synchronised global growth, low inflation, favourable financial conditions and higher corporate profits have supported risk assets for much of 2017.

The recent out-performance of European markets reflects improving economic trends and increased political stability, enabling European equities to catch up somewhat with the bull market across the Atlantic.

So, where do markets go from here?

A pullback cannot be ruled out but with a background of globally synchronized growth, combined with a slow pace of interest normalisation, the outlook for the fourth quarter is favourable. Global equities’ valuations are still within historic ranges although many commentators currently view the US equity market as relatively expensive.

The key is to ensure that your portfolio, whether it be investments, pensions or regular savings, matches your appetite for risk and capacity for loss in a market downturn. Diversification is also important as is regularly reviewing your portfolio and maintaining liquidity to ensure that you can take advantage of investment opportunities as they arise.

Let’s take Spain’s most recent constitutional crisis for instance, triggered by Catalonia’s push for independence, this should serve as an alarm call for global investors who need to ensure that they are properly diversified across asset classes, sectors and regions, in order to mitigate the risks of the fall out of this and other key geopolitical events, and also, crucially, to take advantage of significant opportunities that they simultaneously present.

It is important to review your portfolio regularly and ensure that your adviser is mindful of the impact of each country’s economic strength and outlook on global investing. Think about what events could impact growth moving forward. Spain’s growth projections for 2018 have already been scaled back following the Catalonia crisis. Ensuring that your portfolio is not reliant on any one geographical area is crucial, especially when you consider the size of each economy as detailed below:

Speed Financial Solutions are a highly qualified financial services provider on the Costa del Sol looking after clients throughout Spain and the UK. We provide a discreet and comprehensive service to individuals, our service is tailored to your needs. We seek innovative solutions for our clients and employ our skills, based on many years of experience, to apply tax legislation to our clients’ advantage. Our relationship with clients is built on trust and mutual respect. We are accessible and approachable, and ready to answer your questions, giving you the confidence you want when dealing with a sensitive issue such as discussing your pensions, investments and savings.

Our Principal, Andrea Speed, is a Fellow of the Personal Finance Society (PFS) which is the professional body for the financial planning community. The PFS is part of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.

Fellowship is the highest qualification awarded by the CII and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels.

Along with a Fellowship, Andrea is a CII Chartered Financial Planner specialising in Taxation and Trusts.

Please take a look at our website – for further information and contact us (Tel 951 315 271 or 951 318 529) – we are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation.

Andrea J Speed FPFS (DM), M.A.

Principal, Fellow and Chartered Financial Planner

Speed Financial Solutions

19 October 2017

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