Market’s Starting To Look Like 1987

We are not makers of history. We are made by history. – Martin Luther King, Jr.

History doesn’t exactly repeat, and we always have to be mindful of comparisons where there isn’t a large sample size, but could 2023 play out like 1987?

The Stock Market in 1987: A Synopsis

The Phenomenon of the “Melt-Up”

In 1987, the stock market experienced a unique phenomenon known as a “melt-up.” This occurrence is characterized by a sharp improvement in the performance of the stock market due to a surge in market sentiment and investor interest. During such a phase, stock prices escalate rapidly, often outpacing their underlying fundamentals. The Dow Jones Industrial Average (DJI) had a significant move for several months, and good times were rolling.

The Crash of 1987

Following the melt-up, the market faced a significant downturn, popularly known as the “Black Monday” crash. On October 19, 1987, the Dow Jones Industrial Average plummeted by almost 22%, marking its biggest single-day decline.

The Role of the Federal Reserve

The Federal Reserve played a pivotal role during this tumultuous period in 1987. The central bank adjusted its policies and interest rates in an attempt to stabilize the market. These actions had far-reaching implications, influencing not only the U.S. economy but also the global financial markets.

Market Performance: Comparing 1987 and 2023

Market Gains

In 1987, the Dow Jones Industrial Average (DJI) at this point year to date was up 25%, while the NASDAQ 100-Index (NDX, QQQ) in 2023 so far is up a staggering 39%, mainly driven by manic behavior in select stocks around AI such as Nvidia (NVDA) and Microsoft (MSFT). History doesn’t repeat but often rhymes, and a year-to-date path correlation of 0.74 is worth focusing on.

Market Sentiment

Market sentiment plays a significant role in driving stock market trends. The overconfidence and bullish sentiment observed in 2023 likely resembles the market mood of 1987. This similarity raises the question of whether history might repeat itself, leading to a potential market correction or downturn.

Conclusion: No One Knows

While the comparison between the stock market in 1987 and 2023 offers intriguing insights, it is crucial to remember that the stock market’s performance is influenced by a multitude of factors. Therefore, predicting its trajectory with absolute certainty is impossible.

I am the furthest away from being a perma-bear, or perma-bull, as possible. The one commonality between bulls and bears is overconfidence. My base case I said back in January remains the same.

Be careful of falling for the AI narrative of the moment. The melt-up in the NASDAQ isn’t driven by AI. It’s driven by people.

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