Scary story: Why 2013 looks like 1987

All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.

By Charley Blaine May 17, 2013 8:10PM
Bull © Photographers Choice RF, SuperStockThis is how astonishing the stock market is in 2013.

It's not just that the Dow Jones industrials ($INDU) and the Standard & Poor's 500 Index ($INX) finished the week at record highs. Or that the Nasdaq Composite Index's ($COMPX) finish on Friday was its best since October 2000.

It's just that the gains so far in 2013 have come without any prolonged pullbacks and remarkably few weekly losses.

The Dow has suffered just five weekly losses this year. The S&P 500 and Nasdaq just four. Since the turn of this century, the indexes typically have seen eight to 10 weekly losses by now. That includes even the horrific 2008.

The Dow ended Friday up 121 points to 15,354, just below its intraday high of 15,357. The S&P 500 was up 17 points to 1,667.47, which was an all-time intraday high. The Nasdaq was up 34 points to 3,499.
 
So has the stock market ever had a start like 2013? Actually, yes, and that makes this story a bit nerve-wracking.

The year was 1987. The Dow had jumped 19.9% by May 15. The S&P 500 was up 18.7%.  The gains piled on until Aug. 25, 1987, with the Dow up 43.6% for the year to date and the S&P 500 up 39%.

And then the market tipped. The Dow lost 36% of its value over the next seven weeks. The S&P 500 lost 34%. Most of the market's losses came on Oct. 19, 1987, when the Dow fell 22.6%, still its largest one-day percentage loss.

Could 1987 happen again? Sure.

The 1987 crash was largely a function of an grossly overbought market and a flaw in how the markets worked. Program trading, designed to protect investors against big losses, actually made the losses worse.

While there was little inflation (like now); interest rates had been rising, too. I raise this because of all the talk about when (or if) the Federal Reserve should dial back its giant bond-buying program and let interest rates move up from ultra-low levels.

The economy itself was fairly robust in 1987, and it weathered the crash reasonably well. The Dow, in fact, recovered all of its losses in about two years.

The 2013 market, by a number of measures, is overbought, just as it was in the summer of 1987. The 10-year Treasury yield finished the week at 1.949%, up from 1.865% on Thursday and 1.663% on April 26. So the market is vulnerable to a pullback, but analysts have been saying that for weeks.

The recovery from the 2008-2009 crash is younger than where the economy stood in 1987. Housing is in the early stages of a recovery; the housing market in 1987 was quite active. That may provide support for stocks.

While stocks were higher, gold (-GC) fell for a seventh straight day, settling at $1,364.70 an ounce, down $22.20 from Thursday and down 5% for the week. Gold is down 18.6% this year largely because investors in U.S. gold exchange-traded funds continued a sell-off that began in the first quarter.

Global gold demand was down 13% for the quarter. Higher demand for jewelry in China and India and bars and coins elsewhere was more than offset by ETF selling, the World Gold Council said this week.

The SPDR Gold Shares (GLD) ETF has fallen 15% since March 28.

For the week, the Dow gained 1.6%. The S&P 500 was up 2.1%, and the Nasdaq added 1.8%. For the year, the Dow is up 17.2%, with the S&P 500 up 16.9% and the Nasdaq up 15.9%.

The big catalyst was a decent report on consumer confidence from the University of Michigan.

Twenty-three of the 30 Dow stocks were higher, led by JPMorgan Chase (JPM), Boeing (BA), United Technologies (UTX) and Microsoft (MSFT). (Microsoft owns and publishes Top Stocks, an MSN Money site.)

In addition, 440 S&P 500 stocks gained, led by Tesoro Petroleum (TSO) and Goodyear Tire & Rubber (GT). Cognizant Technology (CTSH) and truck-builder PACCAR (PCAR) were tops among 82 gainers in the Nasdaq-100 Index ($NDX), which tracks most of the largest Nasdaq stocks. The index was up 30 points to 3,029.

The market shrugged off earnings disappointments on Thursday from Wal-Mart Stores (WMT), Dell (DELL), J.C. Penney (JCP), Autodesk (ADSK) and Nordstrom (JWN).

Next week marks the unofficial end to earnings season -- with reports due during the week from Home Depot (HD), Lowe's (LOW), Target (TGT), Toll Bros. (TOL), Sears Holdings (SHLD) and Salesforce.com (CRM).

Markets for the week



May 17

May 10

% chg.

YTD chg.
Dow Industrials

15,354.40

15,118.49

1.56%

17.17%
S&P 500

1,667.47

1,633.70

2.07%

16.92%
Nasdaq 

3,498.97

3,193.87

1.82%

15.88%
Russell 2000

996.28

913.67

2.17%

17.30%
Crude oil 

$96.02

$95.72

-0.02%

4.57%
(per barrel)











U.S. Dollar Index 

84.39

83.23

1.39%

5.65%
10-yr. Treasury yield

1.95%

1.90%

2.58%

10.99%
Gold

$1,364.70

$1,436.60

-5.00%

-18.56%
(per troy ounce)












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153Comments
May 18, 2013 9:59AM
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The Main Stream Market soothsayers just don't get it. The effective Federal Funds rate during the periods of 87,99, and 2007 ranged anywhere from to just about 4% to around 7%. The current effective Federal Funds Rate, around 0.25%. That's practically ZERO. That alone is a huge difference between the periods. Now we can debate the quality of stocks all day long. I say everyone would agree the Dot-Coms  were out of control in 99 value-wise. Stocks were consider CASH before Cash was consider Cash. The last financial crisis was fueled by Junk Derivatives that helped inflate home prices, exponentially.

China far different now, than then. Japan is far worst off debt wise. The Euro is mostly a modern day phenom, introduced officially in 2002. That part of the world is literally in free-fall as is Japan. Don't believe the Stock Markets as a barometer of Economic health.

Bottom-Line, we are in uncharted territory due to the Global Scale of what is now happenings. We didn't fix any of the past problems but have just piled on the CRAP that isn't investment grade. We piled on the Debt and We piled on the free Credit. I for one, predict that at some point the Global FEDS will lose Control and things will literally spiral out of Control. The result, an Epic Collapse that might last for a long, long time.
May 18, 2013 9:59AM
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This is nothing like 1987 - I had hair back then !
May 19, 2013 7:42AM
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regular people are starting to invest again. That always marks the beginning of the end of a bull market.
The talking heads always say it is different this time.  It is not.  Timing is never a thing that can be predicted. I think the market will decline by Oct. Or  Nov.
May 17, 2013 10:05PM
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There is no such thing as over bought when you're playing the market with the printing press spitting out $85 billion in monopoly money a month
May 18, 2013 10:47AM
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 "So, why do you feel we really really need a correction and how would that fortify the resilience of the market."

 

Market corrections are a natural process of balancing asset allocation and resetting expectations. Bubble building based on momentum betting is not a good thing.  Apple's been a classic example. Market corrections allow or prompt investors to analyze the intrinsic values of individual investments and sectors.

May 17, 2013 10:43PM
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When not a single mention is made of margin calls, one has to wonder if the article was meant to be taken seriously or not.  In 1987 "Margin calls, as they were implemented during this period, were one factor that reduced market liquidity, especially in the futures markets, and likely contributed to the severity of the decline." (Source: http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf)
May 19, 2013 10:46PM
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87 was the year I began to invest. I was 41 and had saved very little due to money I was continuing to plow back in the company I started 13 years earlier. I would classify myself as a nervous and cautious investor at this point. You haven't lived till you go through an 87, 01, 08. It'll take some zing out of your day-that's for sure.

 

The interesting thing about recent news is that sales are down and earnings are up. In business, I call this a sign of trouble to come. We see it in our business when salespeople are trying to make their goals by driving selling prices up. Eventually that will get you. Public companies are doing the same thing by creatively cutting back on product costs by giving you less product for the same money. Looked at a bar of soap lately? It holds better in your hand when in the shower but there isn't as much soap in the bar! They've just about squeezed all there is out and there's not any longer a way to keep increasing earnings.

 

I generally don't go to extremes like this but after a 14% return last year and 8% by the end of March, I bailed. Yup-all cash.

 

See ya on the back side.

May 19, 2013 6:47PM
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There are so many fortune 500 companies buying back shares in  there own companies.That usually is a sign that they believe in there companies and also a sign that when you buy back your own stock.they usually go up in share value.I really am confused but the old saying get it while you can is holding to it's truth.
May 19, 2013 8:00AM
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what driven this bull market is people with 401ks. the line completely linear. so if the rate increase is equal to amount of saving. since  there has not been tons of start ups the supply  has not grown a lot.  If really a big bubble I expect exponential growth above inflation.  The question is how many are rich investors and how many are savers who buy and rarely sell until they need to retier. 
May 19, 2013 6:48PM
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"Rule #1, DON'T LOSE MONEY. Rule #2 ALWAYS REFER TO RULE 1. Warren Buffet". If you can't lose it folks  don't invest it. 80 years of the stock market has only yielded 6% growth before taxes and fees which drops yield to below 4%.
May 18, 2013 6:38AM
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This isn't 1987 or 2008. Two decades of zero interest rates for Japan's Central Bank have taken a huge toll on it's viability. There is a genuine chance that Japan will be the first nation to financially implode. It has to occur to any investor that whatever vessel is filled with over-printed money will be compromised by that nation's collapse. The collective array of stocks, bonds and contracts in nations like: Australia, America, Japan, Britain, Canada, Europe and Scandinavia have no tangible substance. The dumbest move was recognizing China as an equal in monetary maturity. It has the ability to make any sudden move it chooses and take whole nations down doing so. Why do you think Germany recalled it's gold. The Dow stands to lose 100% of it's value. No publically-traded entity in America has non-financial or tangible assets- factories, operations, able personnel. Administration and legalese are intangibles and cannot shift to core responsibilities (they have no skills). Gold made sense because it is tangible, but China holds the stockpile now. If it says the price is a $1/ounce now, you get to sit on yours until they say otherwise. The best hedge is in goods we need and use everyday and will continue to. You needed to get in a while ago, gain familiarity with the process chain and integrate into it's flow process to have place in that process. If you didn't and just pulled the pompous asss routine of buying stocks, bonds real estate and metals... you screwed yourself out of the equation. Those things will be quite useless, funded by fiat and unnecessary because they are all over-priced or in over-supply. It was all about bandwagons... and not being on them when they careen over the edge.  
May 19, 2013 9:22PM
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here we disagree ex.  i am shocked, appalled and way beyond concerned .. i am outraged and disgusted at our national lack of control and complicity in this insanity.  we are in debt $4 trillion from the fed, $17 trillion from the government, $2 trillion in unsecured personal debt (student loans and credit cards), and $124 trillion in unfunded entitlement debt.  that's $147 trillion and growing at millions per minute with no fiscal policy response in sight except for endless debates and kicking the can down the road towards the coming train wreck.

 

if you spend a dollar a minute, it takes 11.5 DAYS to spend a million dollars.  at the same rate, it takes 31,700 YEARS to spend a trillion dollars.  a trillion here and a trillion there, and pretty soon you are talking about real money.  based on the total debt of $147 trillion it would take almost 5 million YEARS to pay it back at a dollar a minute.

 

and you think this might all just work out?  what about the similar hundreds of trillions of debt from the other developed nations, including big debtor germany and now sanctioned mass-money-printer japan with no end in sight by ANY of the central banks.  they are all locked in by past policy commitments now and will "do whatever it takes" to continue interest rate repression and money supply hyper-creation - all with impunity as we look on mesmerized by the process.

 

we have been there done that with allowing these derivatives and financiers to run amok with suppressed interest rates - and the solution is to repeat the same insanity of the past?  this is all way beyond horrific and socio-pathological behavior - it is one last giant money grab by goldman, the Rothschild's and the one percent before we are plunged into the financial dark ages.

 

look back to 1987 when the markets disintegrated by 23 percent in one day on "black monday" - the coming one-day crash may well equal or exceed this calamity.  and for what?  to drive up home prices, land values and stocks for the wealthy?  the fundamental economic benefits have been sporadic and fleeting at best - this is one giant house of cards waiting for a little wind to come along.

 

be safe out there .... and don't get me started .... 

May 19, 2013 7:04PM
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You notice Barry S. doesn`t talk about the stock market.If and when the market crashes

he`ll be the first to yell"IT`S Obama`s fault"

May 17, 2013 8:40PM
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Charlie, The basic premise in your analogy with the 1987 market is that the market is overbought, however the flaw is that the 1987 market was not in a recovery mode. Speculation drove the 1987 market. Current market trend is symptomatic of a recession. That doesn't rule out a correction but neither does it forecast an extended downturn.
May 19, 2013 1:28PM
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10-year interest rates were around 9% back in 1987.  Charley mentions interest rates in the article but I don't think he puts strong enough emphasis on it.  Anytime you have interest rates above the 6-7% range, you'd be crazy to buy into a market where the overall PE is higher than 15.  This is not just opinion, it's backed by 120 years of market data.  I could predict the 1987 crash easily just using an excel graph showing S&P price, interest rates, and earning x 15.

 

 

May 19, 2013 8:02PM
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Markets go up, markets go down, they do neither indefinitely. Already up too far for me, a small retail investor, to chase it. i sold everything in August 08 on a hunch, not any particular investment savvy, then started buying only small Bakken operators after that. Whiting, Range Resources, Brigham, etc and sold at their peak- a risk I would not take again but growing up around the oil business, I was impressed with early results from that shale play so I gambled and won. 

As Warren Buffet says, if you cant afford to lose it, dont risk it.

May 20, 2013 8:13AM
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Gold demand down 13%???....that's just the paper gold contracts!  India, China, and the world's central banks are buying up gold as fast as it can be pulled out of the ground.  Try to get a Gold Eagle, Maple Leaf, or Krugerrand for less than $1500.  Try APMEX, Tolving, or even eBay.  It won't happen.  The paper gold is a scam and the World Gold Council are nothing but scammers.  Buy Physical! not their paper promises.
May 20, 2013 7:54AM
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The stock market is experiencing yet another bubble (which will pop) and 47 million people are still on food stamps.

 

Great economy!

May 19, 2013 7:08PM
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Some companies are flush with cash for different reasons fundamentally..

Buy backs can show and increase sh.values, but remember who it benefits most..

Easier and safer for most Corps..Increasing divs is better, but also harder to cut, when times are lean.

I think one-time cash payouts are fairer to the little guy, money now. And does help build share value also...Some companies are not greedy with divs and distributions, some are.

It was sweet when Microsoft did it a few years ago.

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