The new meme that has begun making the rounds involves the potential of a 1987-like crash occurring in US stocks. Marc Faber, who is incredible at getting headlines, floated this possibility as a trial balloon on Bloomberg the other day and that’s all you really need these days.
Michael Gayed, a former protege of Faber’s, explains that a 1987-style crash is not likely this year because of some pretty key differences in the market environment between then and now…
The key reason the ’87 Crash occurred was because of a massive disconnect between the performance of the bond market at the time, which was pushing yields of 10%, and a rising stock market, which was advancing precipitously for the bulk of the year. The significant outperformance of stocks relative to bonds was so stark that it caused the bond/stock ratio to completely collapse (bonds underperformed stocks sharply). The 1987 Crash in stocks completely undid that ratio breakdown and sent the ratio back to its longer-term trend line in a single day.
We simply don’t have this set up now at all. The conditions are no where similar to 1987 internally within the markets. If anything, it is almost the exact opposite. Bond yields aren’t pushing double digits like they did in 1987—they are at historic lows. Stocks have not gone vertical either. The market now is behaving more like it does in a traditional corrective environment within the context of what I believe is a reflationary and bullish year for stocks.
Michael’s work concerns the analysis of relationships between markets, head over below for his whole article.