This week, the 30th anniversary of two formidable storms in October 1987 reminded us that extreme weather and capital market events are not something that only started after the year 2000. While most long-term return charts nowadays show the 1987 stock market crash only as a tiny blip, the application of a base-effect cancelling logarithmic scale illustrates just why this stock market crash was so unsettling. It may not have lasted anywhere nearly as long as the later crashes that burst the 2000 Dotcom bubble or the 2008 subprime credit bubble, but its severity taught the 1980’s privatisation investors that equity investment requires nerves in order to reap the longer term return reward.
Many articles appeared this week, comparing 1987 and 2017 market conditions and warning that it could happen again. Of course it could. As long as the dominating emotions that drive stock market to extremes remain exuberant greed and apocalyptic fear, then extreme stock market volatility is always a possibility.
But are our 2017 market conditions indeed comparable to 1987? In some ways yes, but in other important aspects they are not. The run-up to the 1987 autumn crash was characterised by exuberant investor confidence, with the UK stock market rising over 80% since the beginning of 1986, only to then close 1987 with just a 32% gain over the two years.
