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The Black Monday

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On October 19, 1987, the nightmare scenario now referred to as “Black Monday” hit stock markets the world over, from the U.S. to the Pacific Rim. In one day of trading, U.S. markets fell nearly 23%, and in places like Hong Kong and Australia, results were much worse than that. The general understanding of the cause behind this collapse was the ongoing transference to computerized trading, known as “program trading,” which subsequently became regulated by market-triggering “circuit breakers” to avoid sudden collapses in the years to follow.

These days, we of course rely heavily on computerized trading, but 1987 was still a time of technological growing pains of the sort we no longer experience. Yes, we did see a “flash crash” several years ago that could only have been rendered as severely as it was by computerized trading, but by and large Wall Street does have measures in place to help keep these types of things occurring to our portfolios with little or no notice.

Back then, we had seen a relatively long-term economic expansion in the U.S., freeing up capital from taxes and federal spending (which was instead loaded onto the country’s debt burden) which allowed for investment into things like technology and defense industries. But as this economic expansion cooled, and global oil prices were on a downward slide, the overall success in a soft-landing economy was temporarily interrupted by Black Monday 30 years ago.

The stock market had gone up 44% year over year at the time of the crash. As President Trump points out this morning, the current stock market is up 25% from election day. So if we’re comparing potential “bubbles,” it would appear 1987 was out over its skis further than we may be considered today.

Also, from last decade’s Great Recession, we have seen a slow but determined U.S. economy strengthen over time in terms of employment, pricing and now even inflation metrics. As the Eurozone and China improve economically, we even see global support in a way we could only have imagined 30 years ago.

With a massive surge of Q3 earnings reports gearing up to hit the tape this week and for the following few weeks, although results are not expected to hit their peaks of earlier this year, we still expect upward momentum from industries across the spectrum.

For an in-depth look on what to expect, check out Zacks Director of Research Sheraz Mian’s latest Earnings Preview report: Regional Banks May Do Better than Big Banks

We also see accommodative interest rate policy from the Federal Reserve in 2017 that we decidedly did not see in 1987: even with a widely expected quarter-point rate hike this December, we will still be sub-2%. Back in October 1987, long-term interest rates were up over 10% — and had risen nearly 300 basis points from the start of that year.

Sure, we see some similarities in oil price weakness these days, but that’s about it. And while some people might expect a Russia-Trump Campaign investigation resulting in a Washington DC “circus event” like the Iran-Contra scandal hearings from the summer of ’87, there is no actionable statement or report from Special Counsel Robert Mueller at this time, and at this point there may never be. In short, any way you slice it, we are better off today than we were 30 years ago.




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