1987 Versus 2017: Will History Repeat Or Just Echo?

Authored by Sara Potter via FactSet,

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 that the unwinding process will be gradual, occurring over the course of several years, and be implemented largely by allowing maturing assets to simply run off. In the wake of Hurricanes Harvey and Irma, the odds of another Fed interest rate hike in 2017 have fallen, but it remains unclear whether the timing of the balance sheet unwinding has changed. There is also the risk that the European Central Bank and the Bank of Japan could begin unwinding their QE assets, which could compound the impact on global bond markets.

Soaring Earnings and Low Market Volatility

Similar to 1987, P/E ratios today are soaring. According to monthly data from Nobel Prize winning economist Robert Shiller, PhD, the S&P 500 P/E ratio rose from a low of 7:1 during the 1981-82 recession to a high of 18:1 right before the 1987 crash. Since bottoming out at 13:1 in early 2009, the Shiller P/E is now at 30:1. At this level, the P/E is just below the peak of 32:1 seen just before the market crash of 1929, but not quite as high as the 44:1 seen just before the dot-com bust of 2000-2002.

In addition to high P/E levels, many market observers today are concerned about ultra-low market volatility. The CBOE Volatility Index (VIX) is a popular measure of expected volatility for the S&P 500. Historically, the VIX average is 19.5, but so far this year, the index has averaged 11.5, having fallen below 10 occasionally over the last four months. Some analysts warn that low VIX levels are a sign of market complacency, and some research indicates that periods of extremely low volatility often precede market crashes.

Political Events, Then and Now

Similar to 30 years ago, we are seeing a weakening U.S. dollar, and its value remains a highly politicized issue.

In 1987, the value of the dollar was closely monitored by government officials, especially vis-à-vis the Japanese yen, as Japan accounted for roughly one-third of the total U.S. trade deficit. On October 14, 1987, after the release of worse-than-expected trade deficit figures, Treasury Secretary James Baker publicly suggested that the dollar needed to depreciate further; the Dow fell by 3.8% that day, beginning a four-day decline that ended with Black Monday. According to the Fed’s broad trade-weighted dollar index, as of October 1987, the dollar had weakened by 11.8% from its peak in March 1985 following the 1985 Plaza Accord.

In 2017, although the dollar remains strong by historical standards, we have seen a depreciation of about 9% since the beginning of the year. As noted in part one, a weaker dollar leads to higher inflation (which would actually be a desired outcome today), but the lag time of the price impact is difficult to predict. Today, the Chinese yuan is the focus of government attention, since nearly half of today’s merchandise trade deficit is with China. During the 2016 presidential campaign, then-candidate Donald Trump accused China of deliberately weakening its currency in order to boost exports. Shortly after taking office, Trump backed off from promises to label China a currency manipulator.

The dollar actually strengthened significantly following the U.S. presidential election, surging to a 14-year high on a trade-weighted basis by the end of 2017. The post-election surges in the dollar and the stock market reflected optimism for the implementation of fiscal stimulus under the new Trump administration. But as 2017 has progressed, the lack of movement on health care legislation, tax reform, and regulatory changes (on top of strong economic performance in Europe), has weighed on the dollar, but not so much on the stock market.

Ongoing legislative delays in Washington could continue to negatively impact the dollar and may at some point affect equities. In addition, a battle over the debt ceiling still looms. The U.S. avoided a September government shutdown with a deal this month that would extend U.S. borrowing authority through December 8 and provide $15 billion in relief funds for areas impacted by Hurricane Harvey. This means that discussions about the U.S. debt ceiling have been delayed by a couple of months, and there will be more uncertainty as we approach year-end.

There are two other areas of political risk, both revolving around U.S. international relations. Rising tensions with North Korea have resulted in higher market volatility in recent months, and the prospect of the U.S. pulling out of NAFTA is a negative for U.S. stocks.

As the analysis of 1987 showed, no single event can be blamed for the crash that occurred on October 19, 1987, rather a confluence of factors and events caused a rapid erosion in market confidence. The same can be said in 2017. No single factor indicates conclusively that a stock market correction is imminent, but the risks are out there and merit continued attention.


Clock Crasher Fri, 09/15/2017 - 14:18 Permalink

I've got an overlay for you.overlay 2009 - 2027 with 1983 - 2001.18 year bull market tracking parabolic debt expansion worth 1,000% gains.There are no humans in this market.There are no sellers in this market.

CoCosAB Fri, 09/15/2017 - 14:21 Permalink

"1987 Versus 2017: Will History Repeat Or Just Echo?" of course NOT!In 1987 the fucking FRS wasn't with full throttle on the paper-money printers!In 2017 there is nothing to worry about! Well... It can be a problem if, for some reason, the fucking financial terrorists run out on INK!

24Richie Fri, 09/15/2017 - 14:23 Permalink

Article says that about  1987 "when prices doubled over the course of a year."I don't think so.  The total rate of inflation (CPI) in 1987 was 3.7%.

Victory_Garden Fri, 09/15/2017 - 14:29 Permalink

Quick...grab the oogie-boogie 8-ball and lets ask it.Shake shake shake..."You will eat spagetti and have blue tunafish shnapps in three days after a rainbow moon strikes saturn with a giant antifa." Always trust the trusty 8-ball of answers for everything.

besnook Fri, 09/15/2017 - 14:29 Permalink

there was no qe to infinity in 1987. there were mostly fallible people trading the market in 1987 not algo driven bots. despite any numbers suggesting anything all it would take is one hedge fund with several billion in juice to take this market out, to start a sequence of data that other quant bots would follow......

peepsterC Fri, 09/15/2017 - 14:30 Permalink

Reading this article and the analysis from Shepwave today has me thinking that something big is coming. Why else would Shep cite two other of his analysts for the moves that are coming in oil and in nasdaq?  He has always done that exact thing in the past before a big move. 

bobert727 Fri, 09/15/2017 - 14:39 Permalink

1987...two words...program trading! "In program trading, computers perform rapid stock executions based on external inputs, such as the price of related securities. Common strategies implemented by program trading involve an attempt to engage in arbitrage and portfolio insurance strategies." Kind of rings a bell.......

mjcarr51 (not verified) Fri, 09/15/2017 - 14:33 Permalink

I've been waiting for a 1987 reference. I've got $5 that says we close over SPX 2500 today It's a layup, .......... a free 2.75 pt. SP futures trade.

t0mmyBerg Fri, 09/15/2017 - 14:36 Permalink

I have been watching this correlation closely.  But first of all the chart with the overlay is completely wrong!  She has the drop in the 1987 Spoo in September on the chart!  Wtff!  Uh.  It happened in October?  Also, the Spoo made its annual high on August 25in 1987 with a failed retest on Friday and Monday October 2nd and 5th.  It then spent tuesday thru Friday grinding lower.  Opened down again on Monday the 12th, UP Tuesday the 13th then Wed, Thurs and Friday were bigly lower.  That set up the crash on Monday the 19th of October (again the first chart in this article has this in mid-September!?!?!).  We havent yet made a high as we are making new highs right now!  In September.  Mid Sept at that.  There are guys I respect who have looked at decent probability of a crash based on Fractals, like Andrew McElroy at Seeking Alpha,   https://seekingalpha.com/article/4105915-elroys-elliott-wave-weekly-cra… me it is looking more like we are more in the vein of 2007.  Top was October 11th, failed retest Dec 11th.  Lower into March, then a relative high in May then then more and more crashy until it fell apart in late September with Lehman going under and money markets freezing and all the rest.Caveat though is that the whole Tax legislation crap is just starting to move.  This will be the last hurrah.  Buy the rumor sell the fact.  But the fact will not be fact until later this year at earliest.  Tax repatriation will result in more buybacks but if the non-deductibility of interest is included the whole buyback dynamic stops and capital raising shifts in favor of equity over debt. 

Maestro Maestro Fri, 09/15/2017 - 14:41 Permalink

The rich and powerful are waging a pitiless war against the rest of humanity.

The BRIC countries are only part of the problem and not the solution.

The BRICs are all IMF member countries and are thus forbidden to monetize gold, or link their currencies to gold, or use gold as a trading or exchange mechanism:



India recently collaborated with Western bankers and following the West's instructions, temporarily destroyed the purchasing power of its own Indian population by demonetizing physical cash, under the guise of eliminating tax evasion and cash-only criminal activity. This has had the effect of crashing the gold price by temporarily removing the Indians from the gold market, exactly when the Trump inauguration lit a fire under the gold price.

The Russians never abstained from using dollars even at the time of the communist USSR! If they did not demand gold for their oil during the Cold War, why would the Russians do it now when the Russian central bank is owned and controlled by the City of London banking establishment since the creation of the new Russian Constitution under Yeltsin? The Russians are forbidden to issue their own currency the Ruble without permission from Western bankers and the Russians can only buy US Treasuries with the dollars they get for their oil, not gold. There are more dollar assets than Rubles in Russia:



The gold price would have skyrocketed if the Russians and the Chinese were buying gold hand over fist as alleged. Why do you think that Western bankers would give gold away at or below cost to their purported enemies?

Unless they were not enemies in reality, and just partners playing good cop, bad cop for the purposes of fooling and manipulating their unsuspecting respective populations?


Why do the Russians never ask the Americans to leave Syria where the Americans are illegal invaders under international law? Why did the Russians never prevent the Israelis from attacking their allies the Syrians?

The Shanghai Gold Exchange is a fraud designed to legitimize the fraudulent COMEX "discovered" gold price. Goldman Sachs and JPM never could have manipulated the gold and silver prices lower without active Chinese collaboration. That the Shanghai Gold Exchange is a physical only market is a LIE:


The Chinese government defrauded and stole from their own Chinese citizens by encouraging them to buy gold at the top. The Chinese bankers then colluded with JPM and Goldman Sachs to crash the gold and silver prices. Large amounts of physical silver were leased out and sold into the physical markets by the Chinese authorities as well:




Do not forget: It's the international ruling classes against the common folk. That's the real meaning of globalism.

Farmer Joe in … Fri, 09/15/2017 - 14:46 Permalink

Something tells me the central banks have more tricks up their sleeves.They can't let the market blow up this time. Pensions will get wiped out when the central bank bubble pops.There will be banker/politician heads on pikes this next time around and you can bet your ass they will go all-in before letting that happen.It's coming, but don't hold your breath (like I have for the last 3-4 years).

Gadocat Farmer Joe in … Fri, 09/15/2017 - 15:28 Permalink

The crash will not happen.  All other crashes have occurred with a strong dollar.  This time it really is different.  No one will want to trade shares for dollars, and the ask will rocket up.  I don't believe there is a precedent for our criminal banking system backed by a world reserve sovereign other than the Roman coin debasement.  All hard goods in hand will become a port in the storm.Don't get me wrong -- there will be no one who will accept the dollar at some point -- but there will not be a stock crash because the dollar is set to begin fading fast.

In reply to by Farmer Joe in …

tooldog Fri, 09/15/2017 - 15:12 Permalink

This time is different.  PPT has become MMT (Market Manipulation Team) and will do whatever it takes, and believe me, it will be enough.