After a crash comes the recovery, usually. . .
Published 06/08/2011 | 05:00
THE market turmoil of the last week is the latest in a long line of crashes. The test now will be how quickly the markets turn around, if at all.
Since Black Monday in 1987, markets have recovered fairly quickly after a crash. But this time it has happened when the world economy is already depressed.
Most previous slumps have occurred when the economy has been either booming, or just beginning to slow down.
The crash of 1929 is the most famous of all, but up until the 1930s volatility had been common place.
After the depression, there were decades of post-war stability. That disappeared on October 19, 1987, when the long bull run of the 1980s came to a shuddering halt.
Traders had been nervous going into that Monday. The Dow had lost more than 12pc the previous week and the sell-off started again that day. Markets collapsed in Europe and New York.
The sell-off was accelerated by Program Trading and Portfolio Insurance -- trading methods that essentially increased selling once the index started falling. The results were brutal. The Dow fell 22pc for the biggest one-day loss in its history.
Talk of a recession took over and there was a slowdown in the world economy. On the markets though, the effect of the crash was short-lived. The Dow ended 1987 up 0.5pc.
The Russian default of 1998, the bursting of the dotcom bubble in 2000 and 9/11 attacks all sent world markets through the floor, but every time indices bounced back. The Global Financial Crisis of 2008, however, is still affecting our lives three years later.
Reports of the pending sub-prime crisis had been making their way around trading floors since at least 2006, but it was only in the summer of 2007, when two Bear Stearns hedge funds failed, that the danger to the market began to hit home.
The venerable Bear collapsed in March 2008 and the drumbeat began for Lehman Brothers and Merrill Lynch. By late September, Lehman was bankrupt, Merrill had sold itself to Bank of America, and the full scale of the calamity in insurers AIG was being revealed.
Traders responded by dumping anything they could. On September 29, the Dow stood at 11,143. Two weeks later the market closed at 8,451.
The market has come back since but as we've seen over the last week, gains can be wiped out in an instant. There is a long way to go yet.