1987 and Now: One Major Difference

Perhaps the most noteworthy aspect of yesterday’s market news (besides the panic selling in most emerging markets) was the talk that the current period is shaping up a lot like 1987. Yesterday, the Drudegreport carried a headline saying the markets “Are Like 1987 Crash”. Even the usually optimistic viewers of CNBC’s Kudlow & Co seem to be on edge as 39% of last night’s poll respondents believed the market was likely to trace out a pattern similar to 1987.

While there are certainly similarities between now and then (falling bond market and weaker dollar), there is one glaring difference between now and 1987 which makes a similar crash unlikely. The market's run up to now has been modest when compared to the gains leading up to the crash.  The chart below compares the performance of the S&P 500 two years before the 1987 crash with the performance of the S&P 500 today. In 1987, the stock market was up over 80% in the two years leading up to the crash, and following the crash it was still up 20% vs. its levels two years earlier. In the current period, the S&P 500 is up only 18% over the last two years.

Comments

[ss]

Thanks for this. The press (internet) is constantly on the prowl for the next Bubble to burst. Enough already. This is a healthy process...but always scary and painful.

[Faisal Laljee of StocksandBlogs.com]

Yes. The comparison to 1987 is ridiculous. As you pointed out, some similarities exist, but nothing to lose sleep over. I like the stocks that have rested at their 200 day averages or have bounced off support. Good post!

-- Faisal Laljee

[Max]

I believe there will be a 87 style crash but the difference is it will be in the emerging markets not the US market. I think we need a global yield curve to relate things going forward. Much of the money has been in the emerging markets for the last few years. So the behavior for the same inputs should show up there.

Regards
Max

[bubbs]

The speculative excesses have not occurred on the S&P 500. Try comparing the Russell 2000 over the last two years to the action on the S&P 500 prior to the crash for a more apt comparision.

[kennycan]

My memory may have faded from way back then as I was a green young man only 2 years out of college. But I don't remember everyone and their grandmother saying in Aug/Sep 1987 "this looks just like the period leading up to the 'Crash of ('29, '72, pick your year)'". Perhaps Dr Doom and a few others, but weren't they considered unduly dour until proven correct by the crash itself?

To compare to another period, 1997-98 there were plenty of people that were worried about "irrational exuberance". By 2000 even Greenspan was spouting the New Paradigm excuse. And people like me were considered unduly dour until proven correct by the crash itself.

When everyone shrugs off 2week 3-5% drops like this as "heh, another great buy the dip opportunity" that's when I will get really worried.

[x]

The fact that nearly everyone thinks 1987 is not a parallel might just make it more likely to be so. ie, The buy the dippers continue to step in and get slaughtered, adding more fuel to the selling, thus creating more of a self fulfilling prophecy.

The comparison to 1987 cannot be done using the S&P. The S&P was the market leader in 1987 and it hasn't led the market since 1998. Commodities, transports, broker/dealers, small caps, put them on the chart. The idiots have run them off of a cliff to levels not seen in 15 years to 50 years depending on the index.

And, with the market's earnings being the most cyclical in 50 years, earnings will evaporate rapidly in a slow down. The E in PE is very vulnerable. If this morning's data portends a significant slow down or more, historical perspective will have said this was a foolish time to buy the dips. Why take the risk?

[mike]

But look at MID index before 1987 and 2006 and you will see amazing similarities: top to bottom ratio (8/87 to 7/84) was 2.08, now the ratio (5/06 to 10/02) is 2.099. After such run-up a significant correction is very much due.

[ss]

Crash???

A Global M&A chief has estimated there is $1.5 - 2 Trillion of buying power in the hands of leveraged buyout private equity and hedge funds...and another $2.4 trillion cash on S&P constituent's books. American households hold an additional $5.8 trillion in cash and short term securities....add all this up and it equals roughly 70% of the value of the S&P 500. I fail to see any probability of a "crash" given this liquidity glut...and the steady "de-equitization" from M&A, buy backs, etc.

But build me a Wall of Worry!

[Bob A]

Now take the same chart and replace the S&P with the Russel 2000. What do you see?

[Karthik]

The figure by itself doesn't say that much without considering the overall level of valuations and cyclical earnings. When you take those into consideration, the probability of a crash isn't as remote as you claim.

you have the editorial of flash and clash

you have the editorial of flash and clash

you have the editorial of flash and clash

you have the editorial of flash and clash

you have the editorial of flash and clash

you have the editorial of flash and clash

you have the editorial of flash and clash

you have the editorial of flash and clash

[runes of magic gold]

you have the editorial of flash and clash