Investors compare the stock market rally of 2021 to the summer before the crash of 1987 – should they?

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Some investors have drawn similarities between the rise in the stock market in 2021 and the trend seen in 1987 when the relentless rally was completely canceled out by the October “Black Monday” crash. However, analysts point out that there are important differences.

DataTrek Research co-founder Nicholas Colas said in a note Wednesday that he certainly thought the comparison was appropriate, at least superficially.

“Everyone from plug-in hedge fund managers to retail investors makes money. The movie Wall Street debuted at the end of 1987 and Budfox has been working from home for a decade. There may be, but the general social vibe is similar. “

However, when comparing the year-to-date performance of the S&P 500 Index, the comparison does not look very good.
SPX,
+ 0.81%
,
He said. The benchmarks for large caps rose 36% until August 17, 1987, but were only 18% over the same period in 2021.

archive: Can the stock market plunge 30 years after Black Monday?

Two years ago, the total returns of the S&P 500 in 1985 and 1986 were 31% and 18% respectively, which is in line with the 2019 and 2020 returns recognized by the chorus. However, he argued that the 2021 rally was a “slight comparison” to what was happening in 1987.

In stock Almost low Wednesday the day after the 30 S&P 500 and Dow Jones Industrial Averages average
DJIA,
+ 0.65%

Each recorded a record of 5 sessions.

Meanwhile, analysts at Bespoke Investment Group pointed out this week that the S&P 500 is moving at a record pace. Tuesday’s all-time high was not only the fifth in a row, but also the 49th in 2021. As a result, this year’s closing price was 78, beating the 1995 record of 77.

Custom analysts have warned that even a 5% pullback could hurt the ability to maintain a record pace. They had a year in which the S&P 500 set a record over 40 on August 16 since 1950, while 1995 and 1964 were the leaders of the year, while 1987, 1997. Years like 1998 also hit records of over 40 at this point in the year, and none topped 50 to end the year.

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But more importantly, what does such a fast closing price mean for the performance of the entire year? Of course, there are exceptions, including 1987, but as you can imagine, it’s almost positive (see table below).

Analysts say the S&P 500’s cumulative earnings for the year are very similar to the median and average earnings for the last five years in the chart.

“Going forward, the median performance of the index for the rest of the year, from the closing price of 08/16 to the end of the year, will increase by 7.7%, with 4 out of 5 positive returns. and all the years. This was more than double the remaining average performance. It’s been years since 1950, ”they write.

So what should investors do with all of this?

Custom analysts have pointed out that the usual caveats apply – there are no guarantees and past performance does not indicate future results – but the data says, “Strength often produces strength in the market. Insist on observation.


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