Wall Street warns of a repeat of ‘Black Monday’ in time for the 36th anniversary

The authors noted that the Nasdaq in 2023 followed a similar pattern to the Dow Jones in 1987, and that this pattern also appeared in Treasury yields.

To be sure, there are a lot of differences between today’s markets and the markets of 1987. On the one hand, stock markets have enhanced circuit breaker mechanisms in order to prevent major indexes from collapsing by double digits within a single session.

Here’s another example: While the S&P 500 SPX has risen this year despite rising yields, the index’s gains have been concentrated in a few stocks. Except for these lucky few, much of the market has lagged or continues to decline after losses in 2022.

Skeptics assert that anxious investors are hearing echoes of what happened in 1987, while ignoring important differences.

“In 1987, the market was more overbought, the October decline before the crash was more pronounced, interest rates were higher, economic growth and inflation were accelerating, and cyclical sectors were stronger” — all in contrast to the current situation, noted Ed. . Clissold and Thanh Nguyen, strategists at think tank Ned Davis, wrote in a note last week.

That has not dampened pessimists on social media, who are eager to predict a collapse before this year’s anniversary, which falls on Thursday.

in October. On the 19th, 1987, the Dow Jones Industrial Average fell 508 points, roughly 23%, in an all-day selling frenzy that reverberated around the world and tested the limits of the financial system. The S&P 500 fell more than 20%. At current levels, any equivalent decline in the ratio would translate into a one-day loss of more than 7,700 pips. Circuit breakers make a drop of the same size nearly impossible.

Even on Wall Street, some are using the anniversary as an opportunity to take another look at Treasury yields and the dark cloud they cast over stocks.

Christopher Wood, global head of equity strategy at Jefferies, recently shared two charts comparing the relationship between stocks and bond yields from 2023 to 1987, marking the point at which stocks seemed resilient to higher yields in 1987 until they finally gave in as the economy shook. Sales operations.

“A possible similarity to what happened in October 1987 is that the historic stock market crash was preceded by a large sell-off in 10-year Treasuries during the summer months,” Woods said in the report.

But suppose, for the sake of argument, that stocks experience a 1987-style sell-off. How then would the bond market react? Will yields fall as they did in 1987, opening the door for stocks to rise again? Some on Wall Street have assumed that a stock market rout is necessary to stop the bond bleeding.

Woods delved into this line of thinking in his report.

But the other notable point to note is that when the S&P 500 collapsed 28.5% in four days, and 20.5% on October 19, 1987 alone, the Treasury market experienced a classic flight-to-safety rebound in the context of a financial crisis. “Then a big drop in the 10-year Treasury yield,” Woods added.

Albert Edwards, a sharp-tongued strategist at Société Générale, also warned of the possibility of a 1987-style collapse.

be seen: “Just like in 1987.” Here’s what could deal a “devastating blow” to stocks, says Albert Edwards, a strategist at Societe Generale.

But NDR’s Clissold and Nguyen said that “although there are many high-level similarities, there is not enough order to conclude that a collapse-like event is likely.”