1987 And Market 'Accidents' Waiting To Happen

Marc Faber noted recently, "markets will punish the interventionists one day," and while we are already seeing 'accidents' occurring in JGBs, Gold, EM debt, and now US Treasuries; US equities remain immune. However, given the current uncertainty of macro-economic data, high-leverage, fear of rising interest rates, and instability of currency markets, all of the same conditions that led to the 1987 crash are now present in financial markets. Does this mean the markets are going to crash? Certainly not; but the conditions may be right for another 'market accident' to happen.

 

Correlation is not causation...

correlation is not causation...

 

It's different this time...

The following quotes from the Fed's research paper entitled "A Brief History of the 1987 Stock Market Crash With a Discussion of the Federal Reserve Response" - embedded below - were listed as the primary causes of the 1987 crash...

"During the years prior to the crash, equity markets had been posting strong gains. Price increases outpaced earnings growth and lifted price-earnings ratios; some commentators warned that the market had become overvalued"

 

"Importantly, financial markets had seen an increase in the use of “program trading” strategies, where computers were set up to quickly trade particular amounts of a large number of stocks, such as those in a particular stock index, when certain conditions were met."

 

"The macroeconomic outlook during the months leading up to the crash had become somewhat less certain. Interest rates were rising globally."

 

Ring any bells?

(h/t @RonnieSpence)

 

Full Fed paper below:

Fed 1987