• 205 days Could Crypto Overtake Traditional Investment?
  • 210 days Americans Still Quitting Jobs At Record Pace
  • 212 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 215 days Is The Dollar Too Strong?
  • 215 days Big Tech Disappoints Investors on Earnings Calls
  • 216 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 218 days China Is Quietly Trying To Distance Itself From Russia
  • 218 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 222 days Crypto Investors Won Big In 2021
  • 222 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 223 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 225 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 226 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 229 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 230 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 230 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 232 days Are NFTs About To Take Over Gaming?
  • 233 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 236 days What’s Causing Inflation In The United States?
  • 237 days Intel Joins Russian Exodus as Chip Shortage Digs In
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

  1. Home
  2. Markets
  3. Other

1987 vs. 2014: Should We Be Concerned About A Crash?

Why You Should Care About Black Monday

Since it happe32ned 26 years ago, many investors have lost perspective on the widespread financial damage that occurred on October 19, 1987. The S&P 500 dropped 20.47% on the day known as "Black Monday".

Black Monday

Bull Markets Are Typically Derailed By Recessions

The recent net-worth-denting bear markets were caused, for the most part, by problems in the economy that eventually translated into economic weakness. The dot-com bear market was accompanied by a contraction in the U.S. economy.

GDP Quarterly Change 2000-2001

After the housing bubble began to lose air, the financial crisis bear market that followed was marked by some ugly GDP figures.

GDP Quarterly Change 2007-2008

How About 1987?

The GDP figures in 1987 and 1988 did not align with the sharp drop in equity prices that occurred on Black Monday.

GDP 1987-1988

Markets Move Based On Fundamental Perceptions

There is a reason traders who focus on price/observable evidence are successful. Price captures the aggregate opinion of all market participants about future economic outcomes, earnings, valuations, systemic risk, monetary policy, the Fed, etc. In 1987, perception shifted quickly. Using a simple example from 2006-2008 to illustrate the concepts of using observable evidence, the slope of the green arrow below told us bullish economic conviction was stronger than bearish economic fear. The orange arrow told us the conviction of the bulls was waning, and to have defensive plans in place. The slope of the red arrow told us economic fear was much stronger than bullish economic conviction. The slopes of lines A, B, and C are observable and can be incorporated into an IF, THEN investment strategy.

1987: Were The Charts Helpful? You Decide

If broad measures of economic activity were not particularly helpful in spotting trouble in 1987, could charts/observable evidence have assisted investors in terms of reducing the damage to their net worth? This week's video examines 1987 in detail and compares the market profile the day before Black Monday to the current profile in January 2014. The video also incorporates IF, THEN concepts to build prudent investment allocations based on evidence in hand, rather than relying on predictions of a very uncertain future.

If you want another example of using observable evidence to navigate a difficult period, this video clip walks through the 2010 "Flash Crash" step by step.

2014: China Hampers Fundamental Outlook

Bank - Confidence in China remains fragile

As we outlined in this January 20 video, the big picture continues to align with the economic and stock market bulls, but bullish conviction is waning. Concerns about a credit crunch and/or defaults in China continue to weigh on investors' minds. China's central bank is trying to right the ship. From Bloomberg:

China's benchmark money-market rate fell while stocks rebounded as the central bank added more than 255 billion yuan ($42 billion) to the financial system and expanded a loan facility to meet Lunar New Year demand for cash.

As of 1:00 p.m. EST Tuesday, the injection of cash was not translating into renewed confidence; the emerging markets ETF (EEM) was down 0.40%, and the China ETF (FXI) was down 0.25%.

Investment Implications

If defensive assets gain traction, our concerns about recent slowing bullish conviction will increase. During Tuesday's session, growth-oriented small caps were still providing leadership while defensive assets, such as consumer staples were lagging the broader S&P 500 (see charts). For now, the slowing bullish momentum has not translated into meaningful and observable changes to the market's risk-reward profile. The evidence continues to favor stocks. Consequently, we continue to maintain positions in U.S. stocks (VTI), financials (XLF), technology (QQQ), small caps (IJR), Europe (FEZ), and global stocks (VT).


Back to homepage

Leave a comment

Leave a comment