The Sunday Times May 21, 2006 Markets âare like 1987 crashâ David Smith, Economics Editor CONDITIONS in the financial markets are eerily similar to those that precipitated the âBlack Mondayâ stock market crash of October 1987, according to leading City analysts. A report by Barclays Capital says the run-up to the 1987 crash was characterised by a widening US current-account deficit, weak dollar, fears of rising inflation, a fading boom in American house prices, and the appointment of a new chairman of the Federal Reserve Board. All have been happening in recent months, with market nerves on edge last week over fears of higher inflation and a tumbling dollar, and the perception of mixed messages on interest rates from Ben Bernanke, the new Fed chairman. âWe are very uncomfortable about predicting financial crises, but we cannot help but see a certain similarity between the current economic and market conditions and the environment that led to the stock-market crash of October 1987,â said David Woo, head of global foreign-exchange strategy at Barclays Capital. Apart from the similarities in economic conditions, during the run-up to the 1987 crash there was a sharp rise in share prices worldwide and weakness in bond markets, Woo pointed out. âMarket patterns leading to the crash of 1987 resemble the markets today,â he said. Equity markets settled on Friday after sharp mid-week falls, with all the main American stock-market measures recording small gains on the day. But nerves remain. Gerard Lyons, head of research at Standard Chartered, said: âThe volatility is explained by tighter liquidity conditions, markets pricing in more for risk and dollar vulnerability. But people forget that this is not a case of emerging-market economies being in trouble as in 1997-8. Theyâre in good shape.â The vulnerability of stock markets is likely to add to the case for a prolonged pause before the Bank of England hikes interest rates, analysts believe. While one member of its monetary policy committee (MPC) voted for a rate hike earlier this month, some recent data, notably subdued labour market conditions, suggest few signs of inflationary pressure. Base rate is unlikely to rise until next year, according to a survey of analysts by Ideaglobal.com, a financial-research consultancy. It finds a median expectation that the rate, currently 4.5%, will rise in February next year. http://www.timesonline.co.uk/article/0,,2095-2189601,00.html
The similarities are eerie. However one key difference is in place. P/E's in the summer of 1987 were greater than today coupled with dramatically higher interest rates. Valuation wise there's much less air under todays market than 1987. I'm bearish but not crash bearish, although I think a 3-4% down day is looming.
Comparing P/E is not so relevant after an introduction of creative accounting. After use of "purity of earnings" , what is the real E today ? I think use of dividend yield (Dow , SPX) will be more accurate , when comparing.
I agree. That's why I was covering my bases by mentioning the absurdly high rates leading up to the crash. (Rates have NEVER been at those levels again. Bonds bounced 10 handles on Monday night!) The present differential between divined yield and 10 year Treasuries is about 250 basis points. In 1987 the DY on SPX was also in the mid two's with Treasury yields above 10%.
Its all about money flow ( and out flow). Money will flow in -> market will rise ; redemption -> crash. WS criminals will spin any historical stats or ratios anyway they need to ( after the fact). Magically , the "great bull run" started the same year that 401k was introduced and average Joe was forced to send his 100$ a week to those crooks. I never owned a single share ( unless for temporary hedge of my option's position) and never will.
I doubt that many predicted 87 crash. but I was not trading back then so I can't remember the mood of the investment community. It is amusing to see crash predictions starting to appear after 2 down weeks.
if not mistaken, the last time silver had a single-day move with the magnitude we saw in April, was in early 1987
The link below provides a nice visual of the comparisons... the move in silver is outlined on page 2. http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1544663
The market doesn't repeat itself in this fashion. Whenever the next crash happens it will be sufficiently dissimilar to catch plenty off guard. Looking for similarities in order to predict a crash is completely pointless and will likely keep you on the sidelines while the markets make some nice moves - probably getting you in right when they attenuate (to whom do you think the smart money was selling the commodity complex prior to last week). Don't be so foolish.