General Market Commentary – Thu 14 Sep, 2017

By Cory

1987 vs. 2017: Will History Repeat or Just Echo?

This is a fascinating comparison between the 1987 market and where the market currently stands. Depending on the data we can draw many similarities between markets but there are some key points that are brought up in the post below. This is courtesy of FactSet…

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… Here’s there posting…

Last week, I detailed the various factors leading up to the stock market crash of October 19, 1987. As we approach the 30-year anniversary of Black Monday, are there signs that the bull market of 2017 could end in the same way? Let’s compare the financial, economic, and political factors now and then to paint a better picture.

The U.S. stock market is currently in the ninth year of a bull market. As of close September 13, the S&P 500 is up 11.6% since the beginning of 2017 and 269% since March 9, 2009, the beginning of the current bull market. Through its peak on October 5, 1987, the S&P 500 was up 35.5% year-to-date, capping off a five-year bull run, during which the index surged by 220% (starting August 12, 1982).

Inflation, Interest Rates, and Monetary Policy

One of the key factors leading to the 1987 crash was soaring inflation. However, the inflation situation in 2017 is vastly different from what the country was experiencing in 1987, when prices doubled over the course of a year. Today there are worries that inflation is too low; year-over-year monthly inflation has averaged 1.3% for the last five years.

Similar to 1987, the Fed is in tightening mode, having instituted three rate hikes in the last year. The difference today is that rate hikes are an effort to normalize monetary policy following the near-zero rates necessary after the last recession, rather than an attempt to combat soaring inflation. While higher interest rates have a mostly predictable impact on the economy, there is considerable uncertainty concerning the unwinding of the Federal Reserve’s $4.5 trillion balance sheet. In order to help the economy recover following the Great Recession, the Fed purchased bonds as part of its quantitative easing program (dubbed QE). QE had the same impact as lowering interest rates, but with the Fed funds rate close to zero, the central bank needed an additional monetary policy lever. Now that the process of raising interest rates has commenced, the Fed has dropped several not-so-subtle hints in recent months that it would begin the process of selling off its bond portfolio, likely this year. So the question is, what impact will this have on bond markets?

The answer is that no one really knows because such a massive bond sell-off has never occurred before. A cursory internet search will uncover articles that rank the impact anywhere between a yawn and absolute calamity. Former Fed chair Alan Greenspan has warned of a bond market bubble, so there are fears that unloading fixed income assets into the market could send bond prices crashing and yields soaring. The Fed has stressed …read more

Source:: The Korelin Economics Report

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