Both the dotcom crash and credit crunch were deeper and longer lasting, but the speed of the collapse means Black Monday is still held as the benchmark against which all other stock market crashes are compared - the Dow Jones fell 23 per cent in a single day, a sharper drop than the Wall Street Crash in 1929; the FTSE slumped nearly 30 per cent over three. And investors should still remember the lesson that, although it is sometimes assumed markets will bound forever upwards - as those who participated in the early wave of 1980s privatisations or 1990s tech boom surely did - they never do.
There are certainly signs that markets are growing frothy once again. Respected market watcher John Hussman recently said that the risk/reward ratio on US markets is the worst in a century, noting that the cyclically-adjusted PE ratio exceeds 20, well above its long-term average of 14. "Somehow the phrase 'buy low, sell high' is conspicuously absent", he warned. And while bulls may suggest such lofty valuations can be justified by record corporate profit margins, bears will quickly point them in the direction of mean reversion.
FundExpert.co.uk, which has written an interesting ebook remembering the lessons of Black Monday, sees another danger in near-record low government bond yields. In 1987 the mania was for the seemingly limitless riches that could be obtained by investing in shares; today it is a collective rush for the perceived sanctuary of government debt in the face of economic uncertainty, which could unravel with equally nasty repercussions for both bond and equity investors.
But, says FundExpert, these warnings come with a caveat: "The problem is that there is no way to know what may trigger a panic and when." And as veteran trader John Piper told Dominic Picarda in a video interview this week, "we are in a strange period" where the unprecedented backdrop of massive government stimulus makes markets very difficult to read. FundExpert is also "wary of central banks bearing gifts… Gut feeling says this can't end happily."
Certainly many respected investors are positioning themselves for another leg downwards, piling into gold and sitting on cash. But rest assured, they will be remembering another lesson of Black Monday: that a panic-induced crash can present a great buying opportunity. The All-Share more than tripled in a little over a decade afterwards, and for those that kept their heads and were ready to pounce large gains were to be had after the 2008-09 crash, too.
For the well-prepared, it seems, Mondays don't have to be so black after all.
