1987 Black Monday Redux?
In 1987, I was an editor on a financial magazine in Manhattan, living with my wife and baby daughter in a swanky Hoboken apartment. It was the go-go Reagan Era of Boesky, Milken and Gekko. I couldn’t afford my lifestyle, but the markets were booming and I was confident.
Too confident. On October 19, 1987, aka “Black Monday,” the stock market crashed. The Dow Jones Industrial Average dropped 22.6% in that single trading session. All major world markets subsequently plunged, some as much as 40%. My employer went bankrupt, my savings got clobbered, and I found myself out of a job.
I eventually landed on my feet (I always do), with a political gig on Capitol Hill. Over time, the stock market and my portfolio bounced back. But my thoughts this week have returned to those traumatic days. I’m seeing many parallels between 2023 and 1987.
First, let’s be clear: This is not another one of those doom-and-gloom articles that warn of imminent catastrophe. I’m making the case for a defensive posture, until headwinds dissipate.
When history rhymes…
Here’s a list of the commonalities that I perceive between 1987 and 2023:
A contracting economy; elevated inflation; rising interest rates; trade tensions between the U.S. and other countries; geopolitical instability; declining liquidity; a strong U.S. dollar putting pressure on exports; a large increase in the number of bank failures; divided U.S. government; and heavily levered market participants, many of them novices.
The most significant parallel is the rise of computerized trading systems. Back in 1987, this reliance on algorithms was relatively new, and it expedited the ultra-fast panic selling of stocks. Today, “algos” dominate Wall Street to a far greater degree.
WATCH THIS VIDEO: The Rise of Artificial Intelligence, Algorithms, and “Robo-Trading” on Wall Street
Here’s another parallel: In the months leading up to the 1987 crash, an increasingly narrow group of large-cap stocks were carrying the market, as market breadth declined.
We’re seeing bad breadth right now, with new highs on the tech-heavy NASDAQ and new lows on the New York Stock Exchange Advance/Decline line (NYAD). Think of it as the Great Divergence. It’s the tech sector against the world, a dynamic that’s unsustainable.
The tech sector could be a bubble in search of a pin. Chipmaker Nvidia (NSDQ: NVDA) released first-quarter operating results this week that crushed expectations on the top and bottom lines, sending NVDA shares soaring and further propelling the NASDAQ.
The NASDAQ 100 is up 30% year to date. Sustaining the overall stock market has been a handful of mega-cap tech names such as Nvidia. The following chart tells the story:
As a market weighted index, the S&P 500 puts more weight on larger stocks. This method begets a winner’s bias because stocks that are moving up see their market caps increase. These rising stocks then gain more influence on the S&P 500’s performance.
Bad breadth occurs when fewer and fewer stocks are participating in the upswing. When the leaders stumble, the troops usually follow.
The U.S. debt ceiling fight only recently appeared on our radar screens; it could be the trigger for a selloff. During the last bout of debt ceiling brinkmanship in 2011, the S&P 500 fell about 16%, and that was with a last-minute deal. The sheer uncertainty of the battle between President Obama and Congress sent investors to the exits.
But as the holiday weekend approaches, optimism is growing that Congress and the White House will somehow forge a deal. It’s called “climbing the wall of worry.”
The main U.S. stock market indices closed higher Friday, as follows:
- DJIA: +1.00%
- S&P 500: +1.30%
- NASDAQ: +2.19%
- Russell 2000: +1.05%
The NASDAQ posted its fifth positive week. The artificial intelligence craze is exerting a halo effect on tech stocks as a whole.
But the bond market is signaling anxiety about the debt ceiling’s looming x-date of June 1, at which time the U.S. could default on its debt. Yields on securities maturing in early June have soared, with at-risk bills maturing on June 6 featuring yields above 7%. Those Treasury bills would be at risk of nonpayment, causing investors to avoid them. The bond market is a useful barometer, and it’s telling us to beware.
If we get a debt ceiling agreement that avoids a default, and if the Federal Reserve “pauses” next month as expected, two major headwinds will have been removed. Those scenarios are possible but not guaranteed.
I’m not predicting disaster, but risk mitigation is all the more imperative. Make sure you’re diversified. You should hold a variety of stocks and bonds, large-, mid- and small-cap companies, as well as foreign and domestic names. Maintain ample cash levels; a sensible rule of thumb under current conditions is 15% of portfolio assets.
Due to higher interest rates, cash is no longer “trash.” Bankrate says it expects top-yielding savings and money market rates to hit 5.5% annual percentage yield (APY) in the middle of 2023.
Also make sure that about 15% of your portfolio is in hedges, notably gold. There’s enormous potential this year for gold prices to rise relative to stocks. When markets get bumpy and uncertainty reigns, investors typically turn to the safe haven of the “yellow metal.”
Gold can provide both insurance and growth potential for your portfolio during crises. There are several ways to increase your exposure to gold, including gold miners, funds, or even physical bullion itself. Your choices depend on your investment profile and tolerance for risk.
Take comfort in the fact that we’ve witnessed a bevy of regulatory and operational reforms since 1987, including the implementation of “circuit breakers.” It’s also important to note that leading into the 1987 crash, Wall Street was in the midst of a giddy five-year bull market and stocks were greatly overvalued. This year, we’re still mired in a bear market.
That said, odds are increasing of a stock market decline over the near term. Stay defensive and keep your powder dry.
The market has entered a perilous phase. We’re only six days away from the x-date. This Memorial Day weekend, my heart will be with America’s fallen military heroes. I’ll also say a little prayer for a debt ceiling deal.
Editor’s Note: As I’ve just described, we could be on the cusp of a massive shift in the financial world that shakes out the winners from the losers. But my colleague Dr. Stephen Leeb has pinpointed the survivors.
Dr. Leeb is chief investment strategist of The Complete Investor. Amid the financial upheaval he sees on the horizon, he’s convinced that the safest and most profitable plays won’t be tech stocks, “balanced funds,” or any other typical asset.
Dr. Leeb’s research indicates it will be a tiny and obscure $5 real-world investment, as revealed in this report.
John Persinos is the editorial director of Investing Daily.
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