Summary:

• Today is the 30th anniversary of Black Monday
• Given the rise seen in recent years several comparisons have been made
• However the two scenarios are in fact quite different

We earlier noted that today marks the 30th anniversary of Black Monday and looked at the difference between the Dow Jones (US30 on xStation) today and back in October 1987. Let’s now take a broader approach and look at some of the fundamental comparisons between these two points in time. 

Whilst there are some similarities the fundamental backdrop today is quite different to that seen in 1987. Source: S&P DJ indices, NBER, Federal Reserve, WSJ.com 

Running through the table above and highlighting some of the key points. Firstly, the gain seen in the S&P500 (US500 on xStation) is comparable in both cases with the current rise seen since the last bear market of 277% slightly more than the 229% seen to the 87 peak in August. The length of the present bull market is notably longer, with the current 103 months getting on for double the 60 months seen in the 80s. 

In terms of market valuations the trailing 12 month P/E ratio and dividend yield are similar in both years as is the size of the hikes in the Fed funds rate. Whilst the size of hikes are similar their nominal value is not with the Fed funds rate being 7.25% back in 87 compared to just 1.125% today (this is taken as the midpoint of the 1.0-125% range). In terms of real rates the present isn’t quite so low as in nominal terms but with inflation at 1.7% vs 3.9% in 87 the monetary policy backdrop remains more accommodative. The strength of the US dollar is also comparable, being slightly stronger back in 87 than it is at present. 

If we look at just the past year the price action seen in the S&P500 is very similar to that which occurred in the 12 months in the run up to the Black Monday crash. Both times the market enjoyed large gains during this period, with the more recent rise actually outpacing that seen in 1986-87.

 The S&P500 has fairly closely resembled the moves seen in the year before the 87 crash over the past 12 months. Source: LPL Research, Factset

However, if we take a longer term view we can see that the charts are in fact noticeably different. The S&P500 had enjoyed far greater gains in the years that preceded 1986-87 than those seen before 2016-17. If we go back to January 1985 and January 2015 as a start point it is apparent that the rally was much stronger back in the 80s over the course of a near 3-year period leading up to the Black Monday crash.   

 

 From a longer term perspective however the markets bare little resemblance. Source: xStation