Liquidity and the 1987 stock market crash

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Six years ago this month, the venerable, year-old investment banker Lehman Brothers collapsed and the world was plunged into the worst financial crisis since the Great Depression. As the sixth anniversary of the crash approaches, some investors are worried another liquidity and market crashes could already be around the corner.

So just how have capital markets changed since then, and what have we learned? In some ways, the market has fundamentally changed, not unlike after the Great Depression of the s when a generation became frightened of investing in stock markets. Though currently North American stock markets have been setting record highs as credit markets touched record low yields. The crisis prompted the U.

Federal Reserve to pump massive stimulus dollars into the economy. That move pushed bond yields to their lowest point in 75 years. The proliferation of these products and strategies has brought different risks to investors, including liquidity issues, expensive valuations and regulatory changes. Governments have introduced much tougher capital rules on U. This liquidity and market crashes led banks to use far less of their own capital in global markets, which, in turn, has reduced secondary market liquidity and market crashes for many securities and removed some of the more credit-worthy bank counterparties in these markets.

Be skeptical of the next new product or approach to investing. The crisis in was presaged by a record set of innovations in credit markets. Sub-prime asset-backed securities, collateralized debt obligations and increased leverage magnified what might have been a contained real estate correction to a broader financial collapse.

Today, we see many new alternative strategies, asset classes and products, all with their own risks. Plan ahead so you are not forced to sell when market liquidity dries up.

The inability to effectively transact in an illiquid market hastened the crisis. Market participants were forced to sell securities at fire sale prices. Avoid this by owning high-quality investments and use effective diversification with high-quality fixed income investments, mixed with appropriately liquidity and market crashes stocks.

Be aware of the impact of debt levels. Inhigh levels of debt or leverage adversely affected markets. We saw this economy-wide as consumers struggled liquidity and market crashes increased mortgages and consumer debt.

Companies also struggled to restructure under tighter credit conditions. Remember that markets will recover. This is when successful investors are buying, not selling. Investors seem to be watching for what could come next. They have increased over the last several years, but in general market levels have been supported by lower interest rates and improved earnings. Investor mania or failure to liquidity and market crashes investment risk: Today, many investors are preoccupied with what could go wrong, rather than filled with overconfidence in the markets.

However, as we mentioned above, the number of new bond-surrogate-type products can be worrisome. The crisis is a reminder to embrace investment strategies liquidity and market crashes stand the test of time.

Investors should heed lessons learned from history to create a portfolio that can withstand tough markets, respect the past and be open to the opportunities of the future. This article is not intended to provide advice, recommendations or offers to buy or sell any product or service. Liquidity and market crashes info provided in this article is compiled from our own research and is based on assumptions that we believe to be reasonable, accurate at the time the report was written, but, is subject to change without notice.

Leith Wheeler Investment Counsel Ltd. By Leith Wheeler September 16, This entry was posted in Uncategorized. In the Media Read what others are saying about Leith Wheeler here.

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