Monday 16 August 2010

Financial disasters 2 - stock market crashes

The worst two Stock Market crashes in the UK both happened within the last 40 years. From 1972 to 1974, the market lost 70% of its value. Investor confidence was undermined by a spate of bad news, particularly the oil embargo and four-fold price increase that followed Israel’s Yom Kippur War with Egypt.

The market did not recover the ground it had lost in real terms until May 1987. Then five months later, it crashed again. On Friday, 16 October, 1987 hardly anyone was at work in London’s City financial district because of the disruption caused by the Great Storm, the worst in Britain for more than 280 years.

While they were away, prices in New York had been falling steeply. The reasons are not altogether clear - a drop in the price of the dollar, poor trade figures, just that headless chicken panic that seems to grip markets every so often? Anyway, by the time London opened on Monday, 19 October, there was huge pent-up demand to sell. £50 billion was wiped off share prices, and the date went down in history as ‘Black Monday’.

The next day’s collapse was even more precipitous, and by November 9, the index had fallen 34%. The main blame was put on ‘programme trading’ which meant that computers automatically sold shares when they dropped to a certain level, though others thought Mrs Thatcher’s ‘Big Bang’ deregulation had also played its part.

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