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5 UK Stockmarket Recoveries

16 April 2008

At the end of July 2007 the UK stockmarket, like many around the world, started to plunge, with billions of pounds being wiped off the value of shares. When you are invested in the stockmarket, such events can be very unnerving. But it is important to remember that historically the market has always recovered. If you have found this an unsettling time and are looking for reasons to feel more positive, we’ve found five similar drops in share prices which were followed by some equally significant recoveries.

Black Monday – On Black Monday, 19 October 1987, the FTSE 100 index fell sharply following heavy losses on Wall Street the previous Friday. Though the trigger for that crash wasn’t fully clear, there were fears about increasing US interest rates and a falling dollar. By the end of October the UK market was down 26.4% but when economic disaster did not occur, investors started to regain confidence, the market started to recover, and by May 1989, the FTSE 100 was back to its pre-Black Monday level.

Gulf War – The reason for the next fall in the market was more obvious. Reacting to the uncertainty caused by the Iraqi invasion of Kuwait in 1990, the UK stockmarket dropped 15% between August and September. But by the time the Gulf War ended less than six months later in February 1991, the FTSE 100 had bounced back to where it was before the invasion.

Russian Default – It was a credit crisis that led to the next market fall in 1998. When the Russian government suspended the repayment of its debts to foreign governments and devalued its currency, there were concerns that this would lead to a global financial crisis, and stockmarkets around the world fell. The FTSE 100 fell 18.5% between August and the beginning of October, but as it became clear that the other countries had not been affected by the Russian crisis, the UK stockmarket recovered. By the end of that November, the FTSE was back to the level it had been in August.

9/11 – It was perhaps not surprising that the terrorist attacks in America on 11 September 2001 should cause the US stockmarkets to plummet, especially since the US economy was already faltering at the time. The UK market also reacted and by 21 September the FTSE 100 had fallen 12%. This time the market rebounded particularly rapidly after US interest rates were cut in order to stimulate the economy. By 5 October 2001 the FTSE 100 was back to where it had been prior to 9/11.

Tech bubble – The so-called bursting of the technology bubble pre-dated 9/11 but its effects lasted longer. It had started around March/April 2000 after shares in technology and internet companies had reached unsustainably high levels and investors started to withdraw their money. Once share prices started to go down they continued to decline for the next three years with a few interruptions, until the FTSE 100 had eventually fallen 45%. The trigger for the recovery from that bear market was the start of the Iraq war in March 2003. Since then, share prices have risen steadily back to their old levels with a few small hiccups until July 2007.

Learning from the past – Even experienced professionals are sometimes unnerved by the markets’ behaviour. It can be easy to become fixated on the short-term ups and downs of the stockmarket. So how does an investor cope with this? One way is to focus on the bigger picture – the long term.

Stay invested – It can be a natural reaction to become preoccupied with the day-to-day market fluctuations when things have taken a turn for the worse however, this could lead to some rash decisions over the future of an investment. Reacting to a market drop by selling off investments, means that those losses are, in effect, locked in. Patient investors have historically been rewarded by long-term stockmarket returns despite occasional market volatility.

The bigger picture – It’s important to give your investment objectives some perspective – for example, are you retiring soon or in twenty years? It is important that you review your financial goals, as they will evolve and change as you move through life.

The right balance – Diversifying investments across equities, property, bonds and cash, as well as across a number of world markets, can help lower the level of investment risk and make for a smoother investment ride.

Written by Tom Biggar - Investment Manager