The Ghost Of 1987

Uncertainty is creeping back in the asset markets. In the US, the stock market volatility is staging a comeback. The yields of the long-term bonds are rising and the yield curve has flattened. On Friday, the stock markets were under heavy selling with the Dow Jones Industrial average suffering one of the worst one-day point declines in its history. Looking back, we find disturbing similarities with the period just before the biggest single-day stock market crash in history: the Black Monday in 1987.

The timeline of the crash

Before crashing in 19 October 1987, the stock markets were beating records. The bull market started in August 1982 and raged through the ‘Roaring Eighties’. The upward momentum was driven by fast economic growth, by the extensive growth of corporate profits, by the influx of new institutional investors which increased the demand for stocks and by tax breaks for mergers and buyouts. Although the interest rates were somewhat high (the federal fund rate was 7.5 %), they had much decreased since summer 1981 (around 19 %). Compared with the 1970s, inflation was actually low. It was the Goldilocks period of that time. Complacency took hold.

In early summer 1987 something changed. The interest rates started to rise. Doubts about the virility of the economic expansion started to linger during the fall. The growing trade deficit of the US and the declining value of the dollar raised concerns about inflation and the need for higher interest rates. Uncertainty was increasing.

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