This month’s US/global equity volatility after a strong January – August performance will spark inevitable comparisons to 1987. Some are fair and some are less so; we’ll cover both here.
As we’ve mentioned before, the S&P 500 total return history going into both 1987 are 2021 is eerily similar. Total returns for the 2 prior years are virtually identical, which in both cases created strong investor confidence in future gains. (Yes, we were in the business in 1987, working as a mutual fund phone rep at the old Alliance Capital.) The data:
- 1985: +31.2 percent total return on the S&P 500
- 2019: +31.2 pct
- 1986: +18.5 percent
- 2020: +18.0 pct
Now, the 1987/2021 comparison does fall apart a bit in terms of the absolute return for each year through late August/early September:
- In 1987, the S&P 500 peaked on August 25th with a +39.1 percent gain.
- For 2021 YTD, the top on the S&P was on September 2nd with a 20.8 pct gain, or 18 points lower price return than the heady results of 1987 through a similar timeframe.
Because 2021 wasn’t running as hot through the end of the summer as in 1987, the effect of the typical “September swoon” we’ve been discussing in recent reports has not been quite as pronounced:
- Since its peak on September 2nd, 2021, 11 days ago, the S&P is down 4.0 percent.
- 11 days after its August 25th, 1987 top, the S&P was down 5.8 pct.
As far as what the 1987 comparison can tell us about what happens in the next few days/weeks, a few thoughts before we address the elephant in the room (the October crash):
- By this point in 1987, the S&P 500 was getting close to washed out for September.
- The month’s lows occurred 7 days later, down a further 2.1 percent.
- Overlay that experience on 2021 and it implies that the month’s lows will come on September 29th at levels slight below (1-2 pct) today’s close.
Now, so far all we’ve done is look at 1987 as an example of what happens in September when we go into the month with a hot YTD return and after 2 prior years of above average S&P 500 price performance. Even within the obvious statistical confines of a 1-year comparison, this still feels valid and consistent with both what we’ve seen occur and the aberrant negative September returns we’ve previously documented for you. US equities are doing what you’d expect.
So, what about the rest of the 1987 scenario, specifically the October crash? Three points on that:
1: Markets don’t crash from overbought; they crash from already deeply oversold conditions. In the 10 trading days before the October 19th, 1987 crash the S&P saw 5 days where the index declined by 1-5 percent/day and only 1 where it rallied by +1 percent.
2: October 19th, 1987 was not the low for the year. That came on December 4th, although it was very close to 10/19’s close: S&P 500 at 223.92 versus 224.84. This is the origin of the “markets have to retest crash lows” myth that led many to miss the 2020 lows and stay out of the market too long.
3: The S&P was actually up 5.8 percent on a total return basis in 1987, it and rallied another 16.5 percent in 1988 and 31.5 percent in 1989. The 1987 crash, in other words, is virtually invisible in the market’s longer run history.
Takeaway: there are 2 distinct lessons from 1987 that relate to today’s US equity market.
- The first is that overheated markets tend to correct in September. This is one reason we’ve been saying to lighten up on equity exposure.
- The second is that markets need to stabilize in the next 1-2 weeks as validation that investor confidence remains intact. This is the normal course of events in most years, with October and November making up for September’s weakness. October 1987 is an outlier example of what happens when that does not occur. We don’t think October 2021 will follow in its footsteps but knowing that history is still valuable.
Annual S&P 500 returns: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html