Ten years ago this weekend, world stock markets were in turmoil. On Black Monday, October 19th, 1987, £500 million was wiped off share values in Dublin. In New York, the Dow Jones Index took the biggest plunge in its history while in London shares suffered their steepest ever decline. The warning had come the previous Friday, October 16th, when the US market dropped 118 points - the 5 per cent fall was an astonishing one-day drop at that time. The sharp drop in Wall Street ignited fears that the US could be heading for recession.
On Black Monday, the Dow Jones Index fell over 500 points or 22 per cent. In London, the FTSE Index dropped 250 points or 11 per cent. Bourses throughout the world fell sharply. Traders were powerless as panic gripped the markets, with no buyers to match would-be sellers. In less than a day-and-a-half, the world's main equity markets had lost a quarter of their value. Various reasons for the crash were advanced - from worse than expected US trade deficit figures less than a week earlier which had spooked the market, to an attack by the then US Treasury Secretary James Baker on West German economic policy. But neither was enough to explain the vertiginous 1929-style plunge in share prices.
Wiser counsel picked out the hallmark signs of a classic speculative bubble being burst. The signs of a bubble included that investors were ignoring the economic fundamentals and piling money into shares as if prices could only go up. Another "bubble" sign was the huge volume of junk bond financing for firms that were in no position to finance their debt.
Another influence was computerised program trading. Buy and sell orders were triggered by price movements that breached pre-arranged market or share price levels. So, once the fall started and prices hit certain levels, selling was accelerated through computerised sell orders (this system has now been changed to include points at which buying and selling will be stopped automatically).
Stocks tumbled, rallied, then tumbled again in a topsy-turvy week's trading. Turmoil gripped world markets. In an ominous end to an extraordinary week the US dollar finally gave way after riding out five days of turmoil on world equity markets, falling sharply against the yen and the mark.
New York bottomed out over the week, but the decline continued in Dublin, on and off, until early December when the share values began to recover. 1988 and 1989 were good years for the Dublin market, which then peaked in January 1990 and started to fall again until October 1992. Interestingly, on October 19th, 1992, the Dublin market reached its lowest point in the 1990/1992 bear cycle.
Could the 1987 crash happen again, given that equity market valuations have never been higher? Stock markets have been jittery in recent months as the anniversary of Black Monday looms.
Mr Robbie Kelleher, head of research at Davy Stockbrokers, would not be surprised to see a fairly significant correction in coming months. But he said the correction is unlikely to be on the same scale as in 1987.
