- The 36th anniversary of Black Monday, the largest stock market crash by percent, is coming up on October 19.
- Nearly every year, as if it were seasonal, the chatter grows louder that US stocks are in position to see a 1987-style selloff.
- The most recent example talked about skyrocketing Treasury yields, but there are differences on the other side of the ledger, including gold, that indicate a crash is not coming.
October 1987. I remember it as if it was yesterday. I had graduated from Fort Hays State University the previous May, and with degree firmly in hand I went back to work at my hometown (Lewis, Kansas) grain elevator. What does one do with a PoliSci degree working in a grain elevator in an eyeblink town just off Highway 50 in the middle of nowhere Kansas[i]? Run fertilizer tanks, dump grain trucks, and enter tickets, of course. It just so happened I was working in the office doing the latter the week in early October, overhearing the chatter of those coming in for coffee. Something clicked in my head, telling me US stock markets were set to fall, so I walked into our little in-house commodity office and opened an account. The first trade I ever put on was buying S&P 500 ($INX) put options with only a few days remaining before expiration. If I recall, these went off the board the Thursday (?) October 15, 1987. Yes, just before Black Monday on October 19. They made money, decent money for a kid, so we went out to celebrate at the local Pub with tacos and beer Friday.
Then came Monday.
There is more to the story, and someday I’ll add more chapters, but for now I want to emphasize this is when Newsom’s Market Rule #5 – It’s the what, not the why – was born[ii]. Keep in mind this was back in the day before news was on 24 hours a day 7 days per week. We had the Wall Street Journal to read, the next day, and out in that area is was delivered days after the fact. Still, the common theme was everyone had a different theory as to ‘why’ global stocks crashed with US markets posting their largest single-day percentage declines[iii]. But I wanted to know ‘what’ we knew about the situation before it happened, ‘what’ it was that clicked in my brain telling me something was coming. It’s that same question that has driven me the decades since.
What was the situation in early 1987? A quick search gives us a general summary giving us these key factors:
- A nervous fear that stocks were significantly overvalued and in need of a “correction”[iv]
- Persistent US trade and budget deficits
- Rising interest rates
- A weakening US dollar
How many of these factors can we identify in today’s markets?
- Are stocks overvalued? This is always a subjective argument where a group of 12 analysts/economists will give you 13 different opinions. What measure do we use? The outdated Price/Earnings ratio? Is this the early 1900s? Concentration of the bulk of the value in what has become known as the Magnificent Seven stocks?[v] At Thursday’s close (October 5) the S&P 500 was 4,258.19, up 22% from its October 2022 low but still down 12% from its January 2022 high. Back in 1987 the S&P 500 closed September at 321.83, down only 5% from its all-time high of 337.89 posted during August.
- Based on US government data, for what that’s worth, the US trade deficit continued to decline this past August, coming in at $58.3 billion. On the other hand, the US budget deficit continues to climb. I’m not an economist, but this seems like an ongoing and never-ending situation with no reasonable solution.
- Are interest rates going up? Yes. Have US Treasury yields skyrocketing? Absolutely, with the price charts looking more like a softs commodity rather than the usually docile Treasury market. But for those who weren’t alive in the 1980s, the US Fed Fund rate hit 20% in June 1981and was still 7% in October 1987. At the September 2023 meeting the US FOMC left its rate at 5.33%.
- At the end of September 1987, the US dollar index ($DXY) sat near 98.50, on its way down from a high of 164.70 set during February 1985 and would eventually fall to 85.30 during December 1987. As I write this piece the US dollar index is not weak, but rather climbing to a high of 107.85 this month, its strongest mark since November 2022.
Another path my analysis has turned down over the past 36 years has to do with Chaos. No, not the kind driven by politicians with cell phones and social media accounts, but rather Theory. This includes the Butterfly Effect and Black Swans, and what I believe nullifies any argument for things like analogous years or events. My summation says that a single difference in any key factor changes the outcome. With that in mind, look back at the list of much-discussed factors from back in 1987 and what exists in 2023. They are not the same. Yes, ecnolysts (a word I came up with for the economist/analyst set).
Does this mean we won’t see a 1987 style crash? No. Does it mean we will? Also no. We have to take each instance at its own merits, fundamentals if you will, bringing to mind Newsom’s Rule #6[vi]. I was visiting with a friend Thursday, and we were going over the long list of economic factors that could lead to a stock market crash this month. While I recently wrote I don’t see a crash as an imminent threat, with the ongoing selloff more a seasonal move, the one factor that bothers me the most is the continued destabilization of the US government from both inside and out. Again, the strength of the US dollar versus global currencies indicates the rest of the world still has some level of confidence in the United States but for how long if it continues down this road?
Lastly, as an old commodities analyst who keeps an eye on the macro situation, I still turn to gold as an indicator of trouble brewing. Those familiar with my analysis know I track cash indexes, as much as possible, to read the intrinsic value of a market. In the case of gold this is the COMEX Cash Index (GCY00), and what I see on its long-term monthly chart is a strong downtrend as the GCY00 has fallen to a new 7-month low so far in October. Back in 1987 the nearby gold futures contract posted a low of $281.20 during February 1985 before closing September 1987 at $452.70 as global traders looked for safe-haven. Eventually the market would climb to a high of $502.30 during December 1987.
Based on Chaos Theory and old King Gold, I still don’t see a 1987-style crash coming. But it could be something different, something an old analyst will write about in October 2059.
[i] I can’t say southwest Kansas for those in the state know it doesn’t quite qualify. For everyone else, anything south and west of Topeka (the state capital in the northeast corner of the stage) is considered southwest Kansas.
[ii] As it turned out, this also was sowing of Rule #7: Stock markets go up over time.
[iii] The S&P 500 fell by 20.5% while the Dow Jones Industrial dropped 22.6%.
[iv] I despise this term, for it implies the market is wrong to begin with. When you hear an analyst/commentator say “correction”, more often than not it tells you that individual is on the losing side of the previous move.
[v] These are, in no particular order: Meta (Facebook), Apple, Amazon, Netflix, Alphabet (Google), Tesla, and Nvidia.
[vi] Fundamentals win in the end.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
