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Is another 1987 crash around the corner?

During a bull market, it seem like every single year a chart will start circulating comparing the current price action to a terrible period like 2008, 1987 or even 1929. Well today is that time again. Yogi Berra said it best: "It's like déjà vu all over again." Here is the chart that is making its rounds on Wall Street.

1987 crash redux.png

My thought is that is almost completely useless. Simply lining up two data sets and seeing a similarity doesn't make it predictive of the future. First of all, every pattern will break trend eventually. Secondly, you can match many data sets to previous time periods and get a very different picture. To take just one factor (price) and try to extrapolate out is meaningless and a waste of time.

Is this 1987 again?

Besides the price action of 5 months, are there any similarities to 1987 that you should be fearful of and start selling? Luckily, we don't have to go very far to ask someone that not only remembers 1987, but actually took decisive action for his clients before the bloody Black Monday. The founder of Runnymede, Samson Wang, raised huge cash reserves in the summer of 1987 and was written up in the New York Times article, "What the Bears of Summer Sensed."

He liquidated about $400 million in stocks in the weeks before Oct. 19, the day the Dow Jones industrial average recorded its historic 508.3 point drop. ''It's a very lonely decision when you take drastic action like that,'' he said. ''You have to be confident that you are on the right track, or you are risking the firm's future.''

The good news is that the current environment doesn't resemble 1987 and we don't see the same red flags that Sam saw in that ominous summer past. Back then inflation had risen from 1% to 4% in a matter of months. Interest rates followed suit and the 30-year Treasury rose from 7.5% in March to 9% in May and spiked to over 10% in the days leading up to Black Monday. This caused equity valuations to look extremely unattractive.

Today inflation has picked up slightly but at 1.5%, it still is well within the Fed target range. Furthermore, 30-year Treasuries yield just 2.86% and have fallen since the beginning of the year. Equity valuations remain attractive given the low rate environment and don't resemble the environment of 30 years ago. For now, all is clear.

what is your risk number

"No Known Restrictions: Traders on the Floor of the New York Stock Exchange, 1936 (LOC)" by pingnews.com is marked with CC PDM 1.0

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About the Author: Chris Wang

Chris Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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