- Wednesday, October 16, 2024
As the anniversary of the infamous "Black Monday" approaches, some Wall Street enthusiasts are engrossed in analyzing ominous-looking charts and speculating that one of the most dreadful days in market history might recur.
On social media platforms, there seems to be an eagerness to relive this dark event, evident in the proliferation of viral market charts that compare recent stock market activity to that of 1987. The Market Ear shared an example that gained popularity after Bloomberg's John Authers published a column on the subject.
Authers pointed out similarities between the Nasdaq's pattern in 2023 and the Dow's pattern in 1987, noting that this parallel can also be seen in Treasury yields.
Of course, there are significant differences between today's markets and those of 1987. Stock exchanges have implemented stronger circuit-breaker mechanisms to prevent major indexes from experiencing drastic double-digit declines within a single trading session.
Here's another contrast: Although the S&P 500 SPX has experienced gains this year despite rising yields, these gains have been concentrated in just a few select stocks. Beyond these fortunate few, much of the market has struggled or continued to decline following losses in 2022.
While some skeptical individuals believe that concerned investors are hearing echoes of 1987, they argue that it's essential to consider important differences. According to Ed Clissold and Thanh Nguyen, strategists at Ned Davis Research, the market conditions in 1987 were significantly different. The market was more overbought, the decline in October before the crash was more pronounced, interest rates were higher, economic growth and inflation were accelerating, and cyclical sectors were stronger. None of these factors align with the current market environment, as noted in their recent research note.
However, this hasn't deterred doomsayers on social media who eagerly anticipate a crash coinciding with this year's anniversary, which falls on Thursday.
Reflections on the 1987 Stock Market Crash
On October 19, 1987, the Dow Jones Industrial Average (DJIA) experienced a historic crash, plummeting 508 points, equivalent to almost a 23% decline in a single day. This catastrophic event sent shockwaves reverberating across the globe and pushed the financial system to its limits. In comparison, if a similar percentage drop were to occur today, it would translate to a staggering one-day loss of over 7,700 points. However, with the implementation of circuit breakers in the financial markets, such a significant drop is now considered nearly impossible.
Interestingly, some individuals within the financial community are using the anniversary of this infamous crash to reevaluate the current state of Treasury yields and the impact they have on stocks.
Christopher Wood, Jefferies' Global Head of Equity Strategy, recently shared insightful charts comparing the relationship between stocks and bond yields in 2023 to those observed in 1987. These charts emphasize that stocks seemed resilient to higher yields in 1987 until they ultimately succumbed to an earth-shattering sell-off.
Wood states in his report, "The potential similarity with what occurred in October 1987 is that the historic stock market crash was preceded by a big sell-off in the 10-year Treasury over the summer months."
However, assuming stocks were to undergo a 1987-style sell-off, how would the bond market respond? Would yields decline as they did in 1987, paving the way for a resurgence in stock prices? Speculations on Wall Street suggest that a stock-market rout may be necessary to alleviate the pressure on bonds.
Wood explores this notion further in his report. He explains, "But the other salient point to note is that when the S&P 500 subsequently collapsed by 28.5% in four days, and by 20.5% on 19 October 1987 alone, the Treasury bond market staged a classic flight-to-safety rally in the context of a then dramatic decline in the 10-year Treasury bond yield."
Additionally, Albert Edwards, Société Générale's sharp-tongued strategist, has issued his own warning concerning the possibility of a 1987-style crash.
However, despite these concerns, analysts at NDR, namely Clissold and Nguyen, argue against the likelihood of a crash-like event. While they acknowledge certain high-level similarities, they do not believe enough factors align to conclude that such an event is probable.
Conclusion
As we mark the anniversary of the 1987 stock market crash, many investors and experts ponder the implications of current Treasury yields and their relationship with stocks. While some fear a repeat of history, others remain skeptical of the likelihood of a crash-like event. Ultimately, time will reveal the path these interconnected markets will take.
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