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.
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.|
|U.S. Dollar Index||84.39||83.23||1.39%||5.65%|
|10-yr. Treasury yield||1.95%||1.90%||2.58%||10.99%|
|(per troy ounce)|
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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.
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.
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"
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.
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.
The stock market is experiencing yet another bubble (which will pop) and 47 million people are still on food stamps.
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.
Ahhhh, Upon a 2nd. look at my own feeble Charts...I may have to re-cant.
We may be facing a 2-3% Correction over the next 10 "business days."?
Hopefully it won't be over 2%, and is shortlived.?
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Fed keeps important 'considerable time' language in reference to short-term interest rates, but dissents and dots leave doubts.
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