A little skepticism, a dash of worry, and healthy reflection offer perspective.
Remember Black Monday – that fateful day, October 19, 1987 – when the stock market plummeted a stunning 22.6% in one day? Most of the subsequent articles reflecting on Black Monday start with headlines about why “this time is different.” And for the most part, that makes sense. But ask someone who experienced Black Monday firsthand, and they will tell you that thinking about it happening again gives them the chills.
Comparing 1987 to 2022
First, everyone knows that the market is dramatically higher today than it was 35 years ago. On October 19, 1987, the Dow Jones Industrial Average fell 508 points to 1,738.74. On Monday, June 13, 2022, the DJIA dropped 876 points – more points relative to Black Monday – but that “only” amounts to 2.8%. Yes, that 2.8% was painful, and yes, the drop pushed the DJIA into the almost-bear market territory, as it is off about 17% from its recent high (a bear market is defined as being 20% or more off from a recent high). But for us to have another Black Monday, the DJIA would have to drop about 6,800 points in today’s terms to equate to that devastating day back in October 1987. Very unlikely.
Is This Time Different?
Most of what is being written by the press talks about why “this time really is different.” That thinking is scary. Market cycles that happened, most of the last 15 years, have seen an almost unprecedented bull market run (with a few pullbacks and bears thrown in for good measure). Should you worry that another crash is imminent? Probably not. A little skepticism, a dash of worry, and healthy reflection offer perspective. At a very high level, this time is no different. So, let’s examine the 1987 and the 2022 stock markets:
Valuations
1987: The price-to-earnings ratio (P/E based on forward 12-month earnings) was 23.0 times near the market’s peak.
2022: Midway through 2022, the forward 12-month P/E ratio is 16.6 times. This P/E ratio is below the 5- year average (18.6) and below the 10-year average (16.9). And it is very close to the 25-year-average (16.5).
Note that at the market’s peak in 2000, stocks had a P/E of 27.3.
Interest Rates/Monetary Policy
1987: Monetary policy was tightened, with the fed funds rate rising by nearly 1.5% in the year preceding the peak, reaching 7.25% in late 1987. 10- year rates were at 9.6%, having jumped from about 7% a year earlier.
2022: The Federal Reserve has increased the fed funds rate to 0.75% – 1%. Most expect the Fed to continue its approach of raising rates, possibly raise rates by another 75 basis points next time they meet. But we are still a long way from 3% – witnessed during the global financial crisis in 2008. And yes, the 10-year Treasury yield is also rising and currently stands at about 3.5% – a very long way from the 9.6% of 1987.
So, What Does it All Mean?
Let’s be crystal clear: very few will suggest that a market crash, of October 1987 proportions, is imminent. Four of the most dangerous words for investors are: “This Time Is Different.” So, remember the paraphrased words from philosopher George Santayana: “Those Who Don’t Learn from Market Crashes are Doomed to Repeat Them.”
