ep 381 | How the '87 crash shaped a generation
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On Point with Craig's Investment Partners. The information provided here is general in nature and it's not financial advice. It doesn't take into account your situation, objectives, goals or risk tolerance. All investments are subject to risks and none are guaranteed. Before you make any investment decisions, we recommend you contact an investment advisor. For more information about our services or to view the Craig's Investment Partners Financial Advice Provider Disclosure Statement, please visit our website which is craigsip.com. Welcome to On Point. I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education, and anything else that's happening out there in financial markets.
Hey team, hope you're all going well. Today I wanted to talk about the 87 crash. Big topic here in New Zealand. Big, big topic. I get asked about this a lot, people reference it a lot, usually people of a particular vintage, those that remember those days, maybe had to live through them, had to observe their parents living through the 1980s, which were a tough period in many ways. But what people don't always understand completely is is that the experience of New Zealanders in 1987 was quite different, quite a lot worse than what you saw in other parts of the world. And because of that, it really did change the thinking of an entire generation. So let's talk about that. The share market crash of 87, it was a major global event, but it definitely hit us much harder than other countries, and it did scar Australia.
a whole generation and completely changed the fabric of how we invest. Black Monday in October 1987 saw the S&P 500 index in the US plunge 20% in a day and it ended up falling a little more than 33% from its peak in August of 87 to its trough in December of that year. So that's a big fall, falling by a third. However, the US economy avoided recession and the market had recovered those losses. So it had got back to that August 87 pre-decline level by July of 1989, 20 months later from the bottom to recover to that previous peak. Now, the UK and Japan weren't dissimilar. Major share market indices there fell 36% and 25% respectively. Now, those are also very heavy losses, but the UK market had retaken its previous high 26 months later and Japan within a year.
Just think about that. All of those declines are between 25% and 36%, and the market took 20 months, 26 months, and less than 12 months to recover. That's a really important piece of the puzzle, because here in Aotearoa, things were very, very, very different. We'd had those sweeping reforms of the 1980s, those economic reforms, and they had really transformed the New Zealand economy and share market almost overnight. Financial markets were deregulated. The currency controls were removed, so we had a floating currency. And the banks, which were suddenly flush with cash, they started to compete aggressively for customers to lend to. So that easy credit fueled a wave of speculation, and people started to borrow money to buy shares.
had a new breed of highly leveraged investment companies that borrowed to buy businesses to buy real estate usually commercial real estate and sometimes they even bought each other takeover activity exploded you had dozens of companies listing on the stock market and optimism had really become euphoric you know we think about what we're seeing from the likes of spacex and the tech sector and ai now I suspect that's got nothing on what you were seeing back in the 1980s here in New Zealand. So in the five years leading up to the crash, our benchmark share market index, and it wasn't the NZX 50 in those days, that came much later. Back in those days, it was the Barclays Capital Index. That rose almost 500%, fivefold in just five years.
Look at the US market, and it rose about 200% in five years. So the US 200... Us 500. Big, big difference, wasn't there? So because of all of that, when global markets cracked in October 87, we weren't simply caught in the downdraft of that global downturn.
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