Comparing Markets In 1987 And Today: Investors Are Now Better Protected

by: FP Trading Desk

With North American stock market indexes once again in record-breaking territory, you don’t have to be afraid of heights to wonder if stock prices are getting carried away. Peter Gibson, quantitative analyst at Desjardins Securities, took a peek into history and found that today’s market bears a strong resemblance to 1987.

You remember that year: on Black Monday in August, the Dow suffered its worst one-day plunge ever, ending the day down 22.6%. Back then, and today, the U.S. dollar declined by 30% or more and the U.S. economy was suffering mid-cycle slowdowns. Then, and today, commodities in the CRB index spiked higher. Particularly, both oil and gold went on tears.

So are investors running toward the edge of a cliff that will lead to a similar double-digit one-day plunge? Fortunately, Mr. Gibson sees a few dissimilarities with 1987 that should protect investors from anything too nasty.

Most notably, U.S. inflation is falling today and the Federal Reserve has put interest rate hikes on hold, unlike in 1987. As well, U.S. bond yields have climbed relatively modestly today, unlike the rocket-like trajectory seen in 1987 when bond yields jumped 3.2 percentage points in just 10 months.

“Thus, conditions are not in place for a 1929- or 1987-style crash; rather, a more modest pullback is likely,” Mr. Gibson said.