Could Another “Black Monday” Occur?
On October 19, 1987, the U.S. stock market experienced its largest single-day loss in Wall Street history. The Dow Jones Industrial Average (DJIA) fell nearly 23% or 508 points that day, while the S&P 500 Index dropped by 20%. This month marks the 30th anniversary of this event. This technically could not occur in a single day today, as trading exchanges now employ market-wide circuit breakers, which limit the overall downturns within a single day. To put this in perspective, at today’s current DJIA valuation above 23,000, it would take a decline of nearly 5,300 points for this to occur. A number of factors contributed to this unforgettable day in history. There are some interesting comparisons that can be drawn between where the market was in October 1987 and where it is today, of the market then and now.
- In 1987, the S&P 500 was up 220% over the course of five years, while the current bull market is up 278% over the past eight years.
- Automated trading was a new capability on the stock market that played a crucial role in exacerbating the decline in 1987 as stocks prices began to fall. Today, assets in quantitative hedge fund strategies stand at $933 billion.
- P/E ratios of the S&P 500 were elevated way above their historical average of 16.5 in 1987 at 23.4. Similarly, today’s P/E ratio is elevated above the historical average and stands at 21.8.
While there are similarities between 1987 and today, we do not see a historic market meltdown of those proportions anywhere on the horizon. This current market run, however, is due for a pullback. It’s not a matter of “if,” but “when.” Here are some of the potential headwinds that might affect where we are in our current economic cycle that could lead to a pullback.
- What if corporate tax reform does not occur?
- We are currently in the 3rd longest economic expansion in U.S. history
- The Federal Reserve is unwinding their $4.5 trillion balance sheet
- There are three vacancies on the Federal Reserve Board of Governors and new appointees could be more “hawkish”
- A rising interest rate environment
- $1.1 trillion in outflows from active funds since 2007
- Since 2007, $1.4 trillion dollars that have moved into passive investments
What does all of this mean?
The time for tactical allocation investing is now! At Meeder, tactical allocation and defensive equity strategies are the hallmark of our firm. We believe that tactical allocation paired with strategic and indexed offerings provides the best of both worlds for investors. Tactical allocation strategies are flexible enough to invest in almost any asset class, in any market; nimble enough to make changes at any time, and disciplined enough to take the emotion out of investing. For more information on tactical allocation, please contact your financial advisor or call Meeder Investment Management at 866.633.3371.