The French bank Société Générale is warning that current market indicators are flashing signals similar to the ones seen before the stock market crashed in 1987 during an event known as Black Monday.
Société Générale joins several other prominent market observers in warning of a coming market crash as volatility grows in equities. Investors face increasingly strong headwinds like high interest rates, growing levels of debt, and rising bond yields. The downward pressure on stocks that began in August of this year has continued into October and appears to be accelerating. This is raising alarm bells.
Black Monday
October 19, 1987 is a date that lives in infamy on Wall Street. On that date, the Dow Jones Industrial Average plunged 508 points (22.6%), in what is still the largest one-day percentage drop in the index’s history. Sell orders were so great that trading in New York was halted or delayed nearly 200 times throughout the day. Each time trading resumed, the selling got worse.
Black Monday was caused by several factors, including high interest rates and a rapid decline in the U.S. dollar. In the end though, the selloff was the result of widespread investor panic. Traders rushed to the exits after growing nervous that the then five-year bull run could not continue much longer.
Alan Greenspan, who was then the chair of the Federal Reserve, managed to end the panic by quickly cutting interest rates. He also called on America’s largest banks to flood the market with liquidity. Black Monday has come to be seen as a wake-up call for what was then a grossly overvalued market. Stock losses in October 1987 reached $1.7 trillion globally before the dust settled.
Similarities to Now
In a note to clients, Albert Edwards, a global strategist at Société Générale, said that the current stock market is exhibiting similarities to what transpired in 1987. Edwards mentioned the growing anxiety levels among investors and “increasing uncertainty” about the direction of the U.S. economy as interest rates continue to rise and Washington faces political gridlock.
In his note, Edwards also singles out the record U.S. budget deficit that just hit $33 trillion, the continued threat of a government shutdown, and the 10-year Treasury yield that is nearing 5% as reasons for investors to be worried. “The equity market’s current resilience in the face of rising bond yields reminds me very much of events in 1987, when equity investors’ bullishness was eventually squashed,” he writes.
The Société Générale analyst isn’t alone in his pessimism. John Authers, a markets columnist at Bloomberg, just wrote a similar article on the current similarities to Black Monday. Michael Burry, the hedge fund manager who came to prominence for predicting the 2008 financial crisis, has bet $1.6 billion, equal to 90% of his portfolio, on a coming stock market crash. Many hedge funds have also turned bearish on stocks and are selling.
What’s Next
Market sentiment appears to be getting worse by the day, with the Dow Jones now negative on the year and bond yields continuing to spike. The jobs report due out tomorrow (Oct. 6) is expected to have a sizable impact on the market’s direction.
Data showing a resilient labor force will increase the likelihood that the Fed will keep raising interest rates and the market selling could accelerate. However, a soft jobs report could lessen the chance of further rate hikes and spark a rally. The only thing clear is that investors remain on edge.
On the date of publication, Joel Baglole did not have (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.
