As the anniversary of “Black Monday” approaches, some on Wall Street are observing it by sharing ominous-looking charts and speculating that one of the most terrifying days in market history could occur again.
One might even go so far as to say that some on social media seem eager to relive it, evidenced by the proliferation of viral market charts, while some are comparing the stock market’s recent trading moves to those of 1987. Here’s an example from The Market Ear adhering to a template that caught on after the publication of a column by Bloomberg’s John Authers.
The authors noted that the Nasdaq followed a similar pattern in 2023 as the Dow did in 1987 and that this pattern was also reflected in Treasury yields.
To be sure, there are many differences between the markets of today and 1987. For one thing, exchanges have increased their safeguards to prevent major indices from falling double digits in a single session.
One more thing: While the S&P 500 SPX has risen this year despite rising yields, the index’s gains have been concentrated in a handful of stocks. Aside from these lucky few, much of the market has lagged or weakened further after losses in 2022.
Skeptics claim disgruntled investors heard echoes of 1987 but ignored key differences.
“In 1987, the market was more overbought, the October decline before the crash was far more pronounced, interest rates were higher, economic growth and inflation accelerated, and cyclical sectors were stronger” – all in contrast to the current situation, noted Ed Clissold and Thanh Nguyen, strategist at Ned Davis Research, in a note last week.
That hasn’t deterred doomsday prophets on social media, who want to predict a crash ahead of this year’s anniversary, which falls on Thursday.
On October 19, 1987, the Dow Jones Industrial Average DJIA plunged 508 points, a decline of nearly 23%, in a days-long selling spree that spread around the world and tested the limits of the financial system. The S&P 500 fell more than 20%. At current levels, a corresponding percentage decline would mean a daily loss of over 7,700 points. Circuit breakers make a crash of a similar magnitude nearly impossible.
Even on Wall Street, some are using the anniversary as an opportunity to take another look at Treasury yields and the dark cloud they cast over stocks.
Christopher Wood, Global Head of Equity Strategy at Jefferies, recently published some charts comparing the relationship between stocks and bond yields in 2023 to 1987, making the point that stocks seemed resilient to higher returns in 1987 until they eventually sell-off capitulated to an economic shock.
“The possible similarity to what happened in October 1987 is that the historic stock market crash was preceded by a major sell-off in 10-year Treasury bonds in the summer months,” Woods said in the report.
But for the sake of argument, let’s assume that there actually was a sell-off in stocks like in 1987. How might the bond market react then? Would yields fall like they did in 1987, opening the door for stock markets to rise again? Some on Wall Street argue that a stock market decline is necessary to stem the bleeding in bonds.
Woods elaborated on this line of thought in his report.
“But the other salient point is that the Treasury bond market staged a classic flight-to-safety rally as the S&P 500 subsequently rose 28.5% in four days and 20.5% on October 19, 1987 alone. “There was a then-dramatic decline in the 10-year Treasury yield,” Woods added.
The sharp-tongued strategist at Société Générale, Albert Edwards, also warned of the possibility of a crash like 1987.
See: “Just like in 1987.” That could deal a “devastating blow” to stocks, says SocGen strategist Albert Edwards.
However, NDR’s Clissold and Nguyen argued: “Although there are several broad similarities, these are not sufficient to conclude that a crash-like event is likely.”