Hold on to your hats: the stock market crash will be faster and harder this time

Thirty years ago this Thursday, stock markets had a conniption. October 19, 1987, became known as Black Monday (unless you’re Australian, in which case it’s Black Tuesday).

In New York, the Dow Jones fell more than 500 points to 1738. It’s worth noting that — since the Dow is now towards 23,000 — UK and US stock markets always recover, eventually. Warren Buffett thinks the Dow will hit 1,000,000 in the next 100 years, and who are we to say he’s wrong.

If you want to get rich slowly, there’s no better way than to buy an index fund and leave it alone. That said, we must at least be due another correction. We’ve got shares, bonds and Bitcoin all at record highs. History suggests that at some point, something will give.

One worry is the growing gap between what companies say they are making in profit and what they turn out to have actually made. The difference between statutory profits (what they claimed) and adjusted profits (earnings before bad stuff, or EBBS) is bothersome.

The gap between the real profit and the EBBS numbers is the widest it has been since the 2007 financial crisis, notes Russ Mould at AJ Bell, cowering behind his trading screen as he watches shares ramp up. The difference between the two numbers is now more than 50% .

There are two explanations, one of which is charitable. Maybe large companies are just being transparent, telling us everything they can about the moving parts of their businesses. Or maybe they’re trying it on.

Management don’t have to keep share prices high for very long before equity options are converted into cash in their bank accounts. We can keep holding the shares; they’ll take the money, thanks.

In this context, Mould thinks it will be interesting to look at Reckitt Benckiser’s third-quarter figures tomorrow. The consumer goods firm’s half-year results offered four profit numbers: stated, adjusted, stated with discontinued operations and adjusted with discontinued operations. Uh-huh.

Reckitt is in the midst of an acquisitions spree, not least of Mead Johnson, which saw it take on a lot of debt. The weekend press has it in the running to buy Pfizer’s consumer health business, another huge deal that has to be paid for somehow. Acquisitions may be good but they do create at least the idea that the company is struggling to hit growth targets, and is buying up rivals to cover the difference.

Mould says: “If you’re paying a fat multiple for RB (which you are), you don’t want to see accounting sleight of hand or multiple acquisitions. You do want transparency and the organic growth that you are paying for, especially when the CEO is paid an absolute bundle.”

Back to the next Black Monday. If the market does take fright and falls spectacularly out of bed, it might be even worse than it was 30 years ago.

Dan Squires at Liquidnet, an increasingly powerful mover in the City trading world of dark pools that allows big institutions to trade without alerting the market, notes that there are more ways to trade — to sell — than there were.

“In simple terms, in 1987 to trade shares you were dependent on someone answering the phone on the floor of the Stock Exchange or at a stockbroker,” he tells me. “The fact that lots of market-makers were stuck at home with a tree across the end of their drive, or not prepared to make a price because they were scared, meant lots of phone calls went unanswered. If there was a crash in 2017, there are many more efficient ways for fund managers to trade shares.”

So, high share valuations. Market jitters. Lots of Earnings Before Bad Stuff. War threats everywhere. And a bunch of robots ready to sell in a nanosecond on behalf of large investors.

I do hope I haven’t alarmed you.