A stock market crash occurs when stock prices suddenly and dramatically fall over a broad segment of the stock market, leading to a sizable loss of paper wealth. Selling in a panic and underlying economic issues are what cause crashes. They frequently follow speculative bubbles and the economy.
For those of us who are old enough to recall the 1980s financial landscape, October might bring on the first chilling echoes. As the markets go about their routine of taking current economic and political events into account, the chill typically dissipates as swiftly as it arrived, but for some of us, at least, the concerns continue to fester.
The October 1987 stock market crash is now simply a faint blip on long-term charts. In the great scheme of things, you might call it a tiny purchasing opportunity.
— Advisory Excellence (@_aenetworking) October 7, 2022
But at the moment, it undoubtedly didn’t feel that way. The crisis was stunning because it came so soon after the City of London experienced a boom period fuelled by deregulation dubbed “Big Bang” and a government privatisation programme that brought quick rewards to investors lucky enough to obtain their allocations.
At the time, a huge proportion of City employees had never seen anything like it. As brokers snuck back home, quotation screens turned into seas of red, phone lines stopped flashing, and high frequency computerised trading took over for the first time.
Closing out market positions cost people a lot of money. In those days, private investors had a two-week window during which they may acquire and sell shares without ever paying for them. All that was needed was the money to take the profit or cover the loss at the conclusion of the time, as the case may be.
It appeared to be the end of an era in the days following the disaster. But it was anything but that. Long-term, wise investors who rode the crash quickly recovered their losses. The short termers suffered the most, as would later turn out to be the case in other crises.
The Big Bang
Numerous factors contributed to the collision, and depending on whom you ask, different parties are still deemed to bear some of the guilt. But there’s no denying that central banks’ activities had an impact.
By the time of the crash, interest rates in the United States were already beginning to rise in order to balance the boom brought on by President Reagan’s significant tax cuts in 1986 and a strong rise in inflation.
When October 2022 comes along, there are some similarities in the financial environment, but they are by no means exact replicas. The spring and summer were not a boom time for shares and bonds; on the contrary, rate increases and growing inflation were once again the order of the day.