Last time out on Kudlow, we were discussing the comparo’s to the 1987 Crash. Here are a few overviews (pro and con) I had liked.
Note — I think it was the Barclay’s Capital report that started the comparisons (can anyone point me to a copy? Thanks).
People have terribly short memories — they are bugging out over — what? 5%? The S&P has barely given up half of a 10% correction. Puh-leeze.
Investors are ignoring their market history. 10% corrections during the last secular Bull market were more common than many people realize. In every year from 1996 – 2000, the S&P500 suffered a 10% sell off. (Don’t take my word for it, go check it — BigCharts has a nice custom date feature). That’s 5 consecutive years with at least a 10% whack. (1999 had two of ‘em). We haven’t had one since Q1 2003; we were way overdue.
Consider this: during the 16 year period between 1966–1982, there 5 selloffs of at least 24% — they were 24, 25, 26, 36 and 45% drops in the Dow (which was the best proxy in that pre-indxing period). That’s a ~25% hit less than every four years.
These big “unusual” moves are far more ordinary than most people realize. What is perceived as a "100-year flood" is actually a relatively common occurrence. In the grand scheme of things, this has been a very minor selloff (at least so far).
On the other hand, the 1987 event — down 23% in one day — was very unusual. Yet 39% of Kudlow viewers thought we were in a similar situation. That was truly a "100 year flood."
Other 1987 comparisons pro and con?
• Birinyi Associates notes the stock market runup are wquite different. Stocks have had a good rally since Oct. 2002 (until recently, anyway), just as they did before Oct. 1987. But the S&P 500 was up 80% in the two years prior to the ’87 crash; the S&P has only gained a miserly 18% in the past two years. Hardly the set up for a 23% correction in a day!
• Bernie Schaeffer observes there’s a new Fed Chairman in town — just as Greenspan came to power in July 1987. However, prior to the crash, Greenie took a much more hawkish stance than Ben Bernanke has. WSJ quotes Schaeffer: "Greenspan came out of the crash pretty much the ‘Teflon man’ and the hero because of his swift action to provide liquidity in its aftermath, totally escaping accountability for his contribution to the negative psychology ahead of the crash with his rate-hike threats."
• The dollar is falling, but not nearly as sharply as it was in 1987. Compared with a year ago, it is nearly unchanged against the euro and stronger against the yen. In comparison, the dollar index fell 45% from mid-1985 to the 1987 stock crash (WSJ).
• Bond yields are rising, too, but the increase in yields was more severe in 1987 (see our discussion on Tuesday about yield direction). Prior to the 1987 crash, the 10-year note’s yield rose from 7.23% to 10.15%. Since July 1, 2005, the 10-year yield has risen from 4.06% to 5.05%.
The difference is not just intensity — a 33% gain in ’87 versus 25% today — but absolute levels. Gee, a 10% ten year yield killed the market? Quelle surprise!
The contra view — the pro 87 crash comparison — comes from the UK. David Smith’s column in The Sunday Times, Markets ‘are like 1987 crash’, suggests the foillowing:
"CONDITIONS in the financial markets are eerily similar to those that precipitated the “Black Monday” 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."
What are those similarities?
"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. “Market patterns leading to the crash of 1987 resemble the markets today,” he said.
Gerard Lyons, head of research at Standard Chartered, said: “The 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. They’re in good shape.”
The 1987 comparisons are similar in topics and issues, but not intensity. While many of the same issues are in play, they look quantitatively different.
I keep coming back not to the 1987 comparison, but to the 1973 chart.
About Those 1987 Comparisons
David A. Gaffen
WSJ, May 23, 2006
Markets ‘are like 1987 crash’
The Sunday Times, May 21, 2006