Some intriguing commentary is beginning to circulate, as it usually does on Oct. 19, about a potential “Black Monday” repeat. The particular Black Monday which rocked the market for one of its largest-ever daily percentage declines took place on Oct. 19, 1987 – – a full 36 years ago today. And while much has changed since the late 1980s, various similarities to that period of time have pushed investors to consider the possibility that we could be due for some sort of structural breakdown in the market.
Among the key drivers of the view that a repeat could be on the horizon are stark similarities between bond yields and other key factors, which have been charted out by some financial experts. This has led to an interesting discussion around whether such a situation could happen again.
Let’s dive into what investors may want to make of comparing today with the events that unfolded 36 years ago.
Can a ‘Black Monday’ Crash Happen Again?
In 1987, the market was similar in some respects to today’s market in that most experts considered equities overbought. Interest rates were higher at the time, driven more by economic strength than inflation. But the idea was similar — robust interest rates and overvaluation in the stock market led to a selling frenzy which ultimately saw roughly 23% of the value of the Dow Jones Industrial Average lost in a single trading day. Today’s market may be overbought and rates robust (for different reasons), leading to comparisons between where we are today and where we were just before the “Black Monday” crash. The charts are surprisingly similar.
Of course, circuit breakers didn’t have the same sort of functionality they do today and regulators have greater control over ensuring markets operate in an orderly fashion. Flash crashes have taken place, but have often been resolved in very short order. The “Black Monday” crash was unfortunately more long-lived.
Additionally, it’s worth noting that equal-weighted indices are vastly outperforming mega-cap stocks, such as those in the so-called “Magnificent Seven.” Taking those out of the picture, we see a market that’s actually much more reasonably valued than the market cap-weighted indices would suggest. Thus, perhaps the valuation metrics used to compare today to 1987 aren’t as useful.
We’ll see if another big move lower is in the cards. But as for a 23% single-day downside move? I think it’s unlikely, considering the ability of market makers to essentially turn the market off in periods of intense volatility. Today, the markets seem calm, but for some, maybe it’s too calm for comfort.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
