Echoes of the past

This week it was the 30th anniversary of the 1987 stockmarket crash. The papers and financial websites have been stuffed with interviews with traders who were around at the time, swapping tales of fortunes lost and reputations made as the Dow Jones crashed by 23% in a single day – unheard of before or since.

Meanwhile, in an eerie echo of the Great Storm of 1987, which coincided with the crash in the UK, this week saw Storm Ophelia turn the skies red over Britain. Could it happen again? The short answer, of course, is yes. What’s more interesting – and disturbing – are the differences between now and then.

In 1987, markets were just getting used to moving at the speed of computer algorithms. Today, arguably the “plumbing” of markets is more resilient (partly because of the “flash crash” of 2010), if only because there are more circuit-breakers in place to arrest any future declines on that scale. A bigger concern though is valuations. While 1987 was frightening, it was also just a blip in a long bull market.

Share prices had risen very rapidly during the first half (the Dow had jumped by an incredible 44% in the first seven months of the year, while the FTSE 100 had gained 40%), but as Russell Napier points out in his classic Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms, just five years earlier, in 1982, US share prices had hit record-low valuations.

In 1987, the market certainly needed a breather – and the financial innovation of portfolio insurance made the crash far worse than perhaps it would have been otherwise – but once the Federal Reserve stepped in to promise as much liquidity as the market needed, stocks bounced back fast.

Today’s environment is in many ways far trickier. The level of volatility is quite extraordinary, in that there’s virtually none. Equities are far more overvalued than in 1987, and on some measures even than in 1929 – these days the tech bubble is the only time in history that you can convincingly point to where equities were significantly more expensive than they are now. That makes investing very tricky for today’s investors. From bonds with minimal yields to stocks to property, nothing is cheap. 

Given that backdrop, holding a larger-than-usual amount of cash makes sense to us. However, there’s also the problem that, if our interviewee Jim Mellon is anywhere near correct, we’re all going to have to plan for a much longer life, and that means we’ll need ever-bigger retirement pots too, particularly if robots have pinched all our jobs. So if you’re also looking to grow those pots, you might want to look at some of the stocks that Jim suggests will profit from increasing longevity.

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