A Black Friday replay? Why market pros think it can’t happen

Investing


Still, Hogan feels that despite the various calamities that have visited financial markets over the years, conditions are far safer now than they were then.

“Markets get overheated and we’re going to have sell-offs,” he said. “At some point we’ll have corrections, we’ll have bear markets again. I just don’t think we’ll see that form of dramatic onslaught in any given day.”

However, behavior in the market today has stoked comparisons to what happened back then.

Rising valuations, a seemingly never-ending bull market run, a tightening Fed, rising bond yields — both eras certainly have similar components.

But it’s the degree, according to multiple analyses, that separates the two. In short, there’s little fear on Wall Street now that a Black Monday-type event is coming to a market near you.

“We believe that the stock market stands on a much stronger fundamental and technical foundation today than it did in October 1987, with less euphoric sentiment, making another crash like 1987 appear unlikely,” LPL Financial said in a note. “Improvements in regulations and market structure can be debated, but investors clearly have better access to information and can trade much more easily.”

One of the principal causes of the crash was “portfolio insurance,” which sought to protect investors by selling during market tumult. However, the computers kept selling and never stopped on Black Monday until some leading market participants — Goldman Sachs’ Robert Mnuchin, father of current Treasury Secretary Steven Mnuchin, being one of the most prominent — stepped in as buyers to help stop the bleeding.

There are other key differences.

While the current market continues climbing higher, the 1987 version was stratospheric, doubling in about two years. Inflation and bond yields were considerably higher back then and oil prices were surging. Some similarities: Then, as now, there were significant geopolitical concerns, the dollar was in decline and being talked down by important government figures — in the present case by no one less than President Donald Trump himself — and the Fed was tightening.

However, the issues were far more pronounced back then.

For instance, Doug Roberts at Channel Capital Research said the Federal Reserve of the late 1980s had been aggressively tightening while the current Fed has been gingerly returning policy back to normal levels from the historic aggressiveness during and after the financial crisis.

There’s also little worry, he said, about investors walking away when the market declines.

“There are some similarities with the underlying conditions, the underlying vulnerabilities. The market is certainly richly valued,” Roberts said.

“If you look at the Fed, there’s been hawkish talk, but that’s just about all there is. Right now, the tightening process still resembles moss growing over trees,” he added. “Right now, every dip seems to be met by a purchase as opposed to a sell.”

Still, that doesn’t mean there can’t be trouble ahead for a market that has jumped more than 14 percent this year and is up more than 280 percent from its crisis lows in March 2009.

“On this 30th anniversary of Black Monday, let’s appreciate the gains that we have enjoyed during this bull market but not get complacent,” LPL’s analysis said. “Stocks don’t go up in a straight line. Market events don’t repeat themselves, but they sometimes rhyme.”



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