Market Analysis

Ghost of October Past

Similarities between today and October 1987 abound. But for as many superficial similarities the media highlights, there are as many or more fundamental differences.

Story Highlights

  • As the anniversary of Black Monday, the largest single-day US market drop post-World War II, nears, the media increasingly highlights similarities between now and then.
  • However, most of the concerns they feature have little to no meaningful economic or market impact today. What's more, many of the concerns didn't have much impact back then.
  • Fundamentals today are overall largely positive, and the likeliest scenario is for the bull market to continue its rise.

If you're at all a fan of markets and investing, you don't need MarketMinder to remind you this week contains an important, historical milestone. Friday, October 19, marks 12 days to Halloween. If you don't have your costume already, you're in big trouble because all the good ones will likely be taken. Get shopping.

OK—that's not really the important milestone (though it's very true you should get on the stick if you don't have your costume already). As we predicted in MarketMinder commentary "October Horrors," 10/01/2007, the "Black Friday" headlines are incessant—as are the admonishments that "these days look very similar" to October, 1987.

Here's a smattering, just from today:

Deja Vu: the ‘80s Run Looks Like Today
By Michael West, The Australian,25197,22577389-5001942,00.html

Looking Back on the Lessons of 'Black Monday'
By the Staff,

Exorcising Ghosts of Octobers Past
By E.S. Browning, The Wall Street Journal

Lessons from the '87 Crash
By Ben Steverman, Businessweek

This highlights a popular media tactic—drawing similarities between now and any historic time followed by an ugly market event. For example—1987's crash was preceded by a five year bull market, and we've just had a five year bull run! In 1987 we also had heavy foreign investment in the US, a weak dollar, a big trade deficit, tensions in the Middle East, etc. etc. etc., just like today!

But what economic impact did those concerns have then, and what impact do they have today? That's what's missing from the Black October stories. Yes, the current bull's been running for five years. So what? Saying the bull market must end because something bad once happened to a five-year-old bull market is as legitimate as saying the bull market absolutely MUST NOT end because a very nice thing happened when the 1990's bull market hit its fifth birthday (i.e., it kept running). The bull's age then caused the 1987 crash just as much as its age today causes its continued rise (i.e. it doesn't).

The same goes for the other highlighted concerns. You can find all the similarities you like between today and a rough time in the past, but unless the similarities are rooted in little-noticed fundamentals, it doesn't mean rough times must return. (For more on our views on today's popular concerns, visit the MarketMinder Daily Commentary archives.) And lest we forget, people act as though 1987 was the onset of a brutal bear market and depression, yet it really wasn't all that bad. Though bumpy, 1987 ended positively for US stocks—up over 5%. We cannot understand why the media gets so exercised over a modestly positive year.

What's more, for as many similarities the media finds, we can find differences—both superficial and fundamental. For example, 1987 featured an M&A boom, just like we're having today! Oh no! But hang on—the large majority of those 1987 deals were transacted in stock, inflating stock supply which then depressed prices. Today, the market's earnings yield is well above the bond yield. So? That means CEOs can profitably borrow and pay cash to acquire competitors or buy back stock, which shrinks stock supply. (Remember what we learned happens to prices when supply decreases?)

Fundamentals today make a rising stock market the likeliest scenario. We've seen continued, strong global growth, corporate earnings beating expectations, benign interest rates, and the aforementioned stock supply shrinkage. With a full-fledged correction in our immediate past, it's unlikely we'll see another in the near future. Could it happen? Sure . . . but it certainly won't be caused by superficial similarities to ghosts from 1987. Speaking of ghosts from 1987—that would make an outstanding costume. Layered Izods. Loafers. Or maybe a sheet with a red Devo hat. No stealing—that's our idea.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.