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).
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History Lessons
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!
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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.
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Sources:
About Those 1987 Comparisons
David A. Gaffen
WSJ, May 23, 2006
http://online.wsj.com/article/SB114838578341460534.html
Markets ‘are like 1987 crash’
David Smith
The Sunday Times, May 21, 2006
http://www.timesonline.co.uk/article/0,,2095-2189601,00.html
“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.”
Yada, yada, yada … until consumers recede, credit spreads widen and money flows out.
Imagine that, yet again analysis is coincident! It’s always a question of no vision. Humans have trouble looking too far away. We’re just wired like that.
The macroeconomic scenario of 1987 is very, very similar in potential. I see two major differences between 1987 and today.
1) The size of the macroeconomic scenario unfolding is magnitudes larger today.
2) Some big money has been through 1987 and knows the outcome. So, it appears they are liquidating as a form of more sophisticated risk management or they see something the general population hasn’t yet seen.
It isn’t 1987 for the US but for Brazil and Russia down nearly 30% in a few weeks and Russia and India down 10% in a day is highly, highly unusual historically. Global emerging markets are highly risky right now and the smart money knows it.
It is hard to ignore the potential crisis that has unfolded recently. If global central bankers repeat 1987, and many seem to be so far, we could see world misery return in spades.
History doesn’t repeat itself but it does tend to rhyme. -Mark Twain.
I was having lunch with a buddy of mine who’s been in the biz since 1969 yesterday, and we were discussing how inappropriate it was to compare 1987 with today.
To wit, at this point in the 1987 crash, the Naz was down over 25% and selling was nowhere near done.
Currently, the Naz is down less than 10%, and it appears as though the sellers have already done most of their damage. I cashed out my shorts yesterday in the retirement plans, as I fully expect a bounce that last longer than anyone expects.
Barry that this looks eerily similar to the early ’70’s.
One similarity with 1987 is the increased use of program trading. Program trading has dramatically increased since 1987 with the advent of the internet and more sophisticated trading methods available to the non-professional (especially me).
If there is a significant market drop after a first quarter rally, program trading triggers will activate and begin selling to protect gains. I hope the exchanges have evolved to account for the change in trading methods since 1987.
“Comparo”? What language is this? Porque espanol, no lo es.
Maybe Esperanto (the language of hope)?
Must be that damn Spanglish again. Goddamn illegal aliens. Learn to speak English or go back to Mexico (since all Latinos are, inferring from Lou Dobbs, Mexican)!
Seriously though, something I’ve always wondered: Am I correct in assuming that Ritholtz is of German descent?
There’s no doubt from a cycle analysis, we are comparable to 1936-37, it’s debatable which year we are in, or 1973. We went from blow offs in equities to a weak dollar, hard asset/commodity driven boom. Copper and commodities went meteoric in 1932 to 37 just as it did in the early 70s.
But, looking at the point in time global macroeconomic picture of 1987, there are tremendous potential similarities. The difference this time is the markets seem to be reacting before the scenario fully plays out. And, we don’t yet know if it will play out.
The global markets reacted violently in recent weeks. It’s not normal to see markets sell off so rapidly. Of course, with the rapid speed of money these days, I suspect it will become more of the “new” normal in times of uncertainty.
Today’s market action reminds me of early ESPN when they’d be showing some Budeslige match and the “footballers” would be kicking the ball back and forth in their own side of the field for minutes at a time. Boring.
What we need is Australian rules football and that guy in the white lab coat beneath the goalpost signalling scores! Now THAT was funky. Berman still had hair then.
Where oh where is the American press? Wasn’t reported anywhere. So, the master saw the potential for the cycle to repeat. Then he knew when to profit because Wall Street gibberish is that we are in a secular commodities boom unsupported by any historical fact.
http://www.mineweb.net/sections/gold_silver/298421.htm
The world was awash in a sea of cash. The Bank of Japan joined the party and began sucking up that liquidity in a big way recently, burning speculators in various emerging markets. This will continue for awhile, imo. There has been a philosophy change in Japan that’s affected everyone. I don’t know that this period particularly rhymes with any other. We have a huge labor deflationary force (China), balancing a huge inflationary commodity consumption force (China), balancing a huge assest inflationary force of liquidity. This last force is being dried up a bit. Underlying it all, we have a pretty good world growth picture, imo. It’s a very fine line that’s changing rapidly.
in elliott terms, ’87 was probably the crest of wave 1 off the ’80 or ’82 low, assuming you put 1998 as the crest of wave 3 and 2000 as the crest of wave 5. today we are on wave 2 or b on the downside… i know that’s a general description but the psychology will be different than in the early bull market. we will likely see a long slow grind lower for the next few years. bull and bear markets are about multiples expanding and contracting.. multiples are contracting. we are in a bear market. the counter trend bounce off the ’02-’03 lows was a credit/liquidity/fiscal induced rebound that is not sustainable. the asset market adjusted for commodity prices and foreign currencies displays this vividly. save cash and wait for the fire sale of assets from the baby boomers that won’t end until the S&P trades at 8-10x.. maybe in another 10 years
in elliott terms, ’87 was probably the crest of wave 1 off the ’80 or ’82 low, assuming you put 1998 as the crest of wave 3 and 2000 as the crest of wave 5. today we are on wave 2 or b on the downside… i know that’s a general description but the psychology will be different than in the early bull market. we will likely see a long slow grind lower for the next few years. bull and bear markets are about multiples expanding and contracting.. multiples are contracting. we are in a bear market. the counter trend bounce off the ’02-’03 lows was a credit/liquidity/fiscal induced rebound that is not sustainable. the asset market adjusted for commodity prices and foreign currencies displays this vividly. save cash and wait for the fire sale of assets from the baby boomers that won’t end until the S&P trades at 8-10x.. maybe in another 10 years
also interesting to note that the 2 day rally in the Dow has been led by GM
mkt cap=$16 billion
ent value/ebitda is 40x
nice short squeeze Merrill
i frankly think this rally is lame.. ndx can’t get above the opening print. yesterday pre-open i put 720-722 on my target for a russell 2000 bounce.. today it barely got there and is having trouble getting through.. these hedge funds long beta and small caps (most all leveraged long) will turn them over again if they can’t punch it through… last hour will be huge
Oils and metals! There’s your leadership! Long both but like I’ve said, that is not going to lead the bulls to the promised land. There are some utterly ridiculous moves in some names I bought a couple days ago.
the bond market equivalent is people getting excited over 10 bps/day moves when they 25 bps weren’t uncommon, and that was all of 4-5 years ago. the need for a correction was no more evident than in japan. nikkei up 40% last year and another 9% this year without a very serious correction. this is the most serious one and still was all of 10%. amazingly, there hasn’t even been a 38.2% retrace since stocks started zipping higher last sept. certainly looks health and necessary correction, and helping things out was wednesday’s bullish intraday reversal just two days after a bearish intraday reversal.
I’m young and don’t know much but DO know that EVERYONE is too ‘knee-jerk’ reactive in this market that it’s driving me flippin crazy. Stop worrying about Iraq, Iran, oil, inflation, bird flu, the next crash…my God, how do you guys not suffer from a massive MI every day at bells open.
I’m old, and I have seen a lot, but I agree with young Grucky. We should chill out. However, overreaction is so constant it may as well be an eternal verity. Assume most people will continue to overreact–you can profit from it.
nicely put, in long term doesnt make difference but it’s a hard pill to swallow sometimes when the dow drops 500 in a month when the fundmentals are still strong- earnings. It’s my understanding that that, and that alone, is what controls the market. sure other external factors(interest rates, war, etc) may cause those EARNINGS to decrease, but it still reverts back to earnings.
ya, where is everyone now? still comparing to the 87 crash?? haha