Market Like 1987 Again?

With Thursday being a downside rout that closed near the low for the day, stocks normally see two way action during the next morning before the opportunity for a stronger move comes after lunch. When markets are in the throes of a decline and I would hesitate to call this a decline of significance at this point, many of us turn to history for price analogs. The crash of 1987 really began to unravel the week before which was options expiration week.

Downside momentum kept building from Wednesday’s open and Friday was a disaster. Stocks crashed on Monday as a confluence of events unfolded not limited to newly appointed Fed Chair,Alan Greenspan, raising rates too quickly, Treasury Secretary James Baker announcing that the U.S. would not defend the dollar and this new, cutting edge institutional risk management program called portfolio insurance which essentially sold more S&P 500 futures the lower stock prices went. And the lower stock prices went, the more contracts that were sold. It was a snowball or pile on effect, much like the Flash Crashes of 2010 and 2015. Anyway, I bring this up not because I think stocks are going to crash 20% on Monday. I don’t. It’s just an interesting tidbit which you may hear about in the media, especially from the gloom and doom crowd.

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Fox Business Markets Now on July 25th at 1pm

I am going to be on Fox Business’ Markets Now tomorrow (Thursday July 25) at 1:00pm EDT discussing earnings, the upcoming Fed meeting and where stocks are headed this quarter. 

I am also going to spend some time with the folks at Yahoo Finance creating three segments. The first will be on the comparison between 1987 and the current market while the second will focus on the upcoming Fed meeting and when Bernanke & Co. will begin to pull the punch bowl. The final segment will focus on Canaries in the Coal Mine, the topic I regularly write about in Street$marts and will again in the next issue.

Comparisons to 1987 Mount

For the past six months when asked about my outlook for 2013 I replied that I thought it would be a front loaded year with all or close to all of the gains during the first half of the year.  I have and continue to compare it to 1987 without a one day stock market crash. Others have predicted that 2013 will look more like 1995, the single greatest investing year of the modern era. Now that would make me (and you) really happy! This will be interesting and fun to follow over the coming months.   

Let’s take a walk down memory lane and examine the years before 1987 and 1995 and the present. We will start with 1986, 1994 and 2012. As you can see below, 1986 blasted off right out of the gate, went into a trading range during the middle and then closed near the peak for the year. 

  

1994 is next and this was a very different year with Alan Greenspan and the Fed surprising the markets by raising interest rates in February. That led to a 10% correction, the first one since 1990. The stock market saw three more declines in June, November and December, culminating in Orange County’s municipal bond default after Thanksgiving. Although the major indices only lost a few percent that year, it was an horrific year in the bond market with investor sentiment as negative as you typically see after a bear market. 

   

2012 is below with strength right out of the box followed by a correction in May that led to a melt up in stocks before pre-election jitters took the wind out of the sails into Election Day. The usual year-end rallied ensued. Overall, 2012 was a good year for stocks returning 13%, but ending the year with anxiety over the Fiscal Cliff.  

  

While 2012 was not nearly as strong as 1986, it had similar investor sentiment points and nowhere near the negativity associated with 1994. On the surface, it looks like 2012 fell right between 1994 and 1986. 

Below you can see the first nine months of 1987 and 1995. In both cases stocks took off as the year began, paused, and then took off again.  

  

  

 Here is 2013 year-to-date, which looks like the average of both years so far. 

   

Now is where 1987 and 1995 begin to diverge. Again, I absolutely do not believe we are going to see a stock market crash like we did in ’87, but the pieces are beginning to line up for the largest correction since 2011. The next two charts put it all together best. You can see three distinct almost vertical rallies in 1986-1987 culminating with an August peak and disaster thereafter. In 1994-1995 we see the year long challenging period and the relentless bull run. 

   

     

 Today (below), we are somewhere in the middle so far price wise. Alan Greenspan and the Fed were one of the main driving forces behind the collapse in 1987 along with computerized trading and Washington put its foot in it mouth. Is today that much different if Bernanke & Co. start the unwinding process at one of their next two meetings? In my view the only question for the stock market is if it is peaking right now or will there be a 4-8% pullback first followed by a final run to all time highs. 

 

If you are concerned about portfolio or the scenarios I laid out and want to have a more detailed discussion, please contact me directly at 203.389.3553.