Ghost of ‘Black Monday’ still haunts

Memories of the day when the blue-chip stock index was undone by panic to trigger a record Dow Jones Industrial Average plunge of 508 points, equal to a 22.6% drop, stands as a stark reminder that no market is crash-proof.

Indeed, on the 30th anniversary of the biggest one-day stock market crash in history, many observers wonder if another crash could be imminent.

The current bull market began for the S&P 500 eight years ago, with the benchmark index having since gained up to 250%, a figure many predict must herald a major fall sometime soon.

Jim Rogers, who co-founded the Quantum Fund with George Soros, warned of a possible “$68 trillion biblical collapse” earlier this year. Marc Faber, of the Gloom, Boom, & Doom financial report, has predicted US stock markets could correct by as much as 40%, and that unwitting investors are “on the Titanic”.

As to the likely source of the next crash, he said: “It may come from a credit event, or a disclosure of a major fraud or because interest rates start to rise — even small events that can trigger the decline.”

With market declines, the question is when rather than why. In January 2016, Royal Bank of Scotland advised clients to sell everything except high-quality bonds. This is about return of capital, not return on capital.

As Wall Street and world markets come to rely more on ever-faster technology, crashes may be triggered by a rogue trading algorithm, a cyber attack on a bank, or a systems malfunction that prompts an investor panic.

“With the electronic market today, things can get out of control very quickly,” said Joe Saluzzi, co-author of Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence.

While computer programs offer faster, cheaper trades allied to speed-of-light analytics, their downside has seen the advent of ‘hot money’ — investments shifting constantly from one stock to the next and one market to another, always in search of higher returns.

“We don’t know when the next crash is going to be,” said Mr Saluzzi. “But when it happens, it’s going to be really, really ugly.”

In response to the 1987 crash, the US Securities and Exchange Commission created ‘circuit breakers’ that call a temporary halt to trading after the Dow declines 10%, 20%, and 30%. Only one market halt has been triggered since then, in 1997, with the circuit breakers adjusted again in 2012 to further lower the thresholds.

While the financial climate of 2017 is potentially volatile, today’s tech-driven dangers, on the surface at least, appear less vulnerable than they were in the days leading up to the 1987 crash. This year’s gains of around 15% are well below the 40% run up to October 1987, while 10-year Treasury note yields are under 2.50%, compared to 10% in the week leading up to that fateful Monday.

Perhaps it’s best to follow the advice of ‘the world’s best investor’, Warren Buffett. “The years ahead will occasionally deliver major market declines, even panics, that will affect virtually all stocks. No one can tell you when these traumas will occur.”


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