As market pundits either celebrate or examine the stock market crash of 1987, there comes point when all analysis becomes a form of paralysis. Some say a crash won’t happen again while others proclaim, almost daily since the 2009 low, that a crash is just around the corner. When posed with such a question, we always ask, what is our point of reference?
To arrive at a point of reference, we read an article that says that the S&P 500 has had it “Too good, Too Long.” We liked this reference point as it charts the S&P 500 from 1996 to 2017. We decided to use the same number of trading days for the Dow Jones Industrial Average going backwards from the 1987 peak at 2,722.42, which led us to the beginning of 1966. When you contrast the price activity of the S&P 500 against the Dow Jones Industrial Average over the two periods, we get a point of reference that is all too telling.
Our observations of the market leading up to the the peak in the Dow Jones Industrial Average on August 25, 1987 contrasted with the S&P 500 since 1996 tells us a few things that need pointing out.
First, nothing that has happened in the exact same number of trading days between the two indexes is unique. The Dow had declines of –35%, –44%, and –26% in the late-1960’s and 1970’s. Likewise, the S&P 500 experienced declines of –49% and –56% in the period of late-1990’s and 2007-2009.
Second, the rise from the lows could be considered to be almost equal. If we take the low of 2009 for the S&P 500 and compare it to the corresponding low in the Dow Jones Industrial Average, based on the same number of trading days, we find that the increase in the S&P 500 is not unusual at this point as compared to the Dow. From the 1978 low in the Dow, the index gained +266% to the 1987 peak. The 2009 low in the S&P 500 Index the gain has been +278% so far. If we take the ultimate low in the Dow Jones Industrial Average from 1974, the increase was +371%. This puts the S&P 500 well within the range of “normal” for a market rise.
Third, looking at where the Dow Jones Industrial Average was and where it currently is, there is little to suggest that the action of the S&P 500 cannot go a significant distance above the current level with moderating declines in between. Does the S&P 500 have to do in the future what the Dow Jones Industrial Average has done in the past? Absolutely not! However, looking at what has happened could help to put the coming decline in the market into proper context. As our latest bull market ranking has demonstrated, there is still a lot of upside potential in this market.
In reality, a market crash is always on the horizon. Also, when data is provided, if there is no context then there is no meaning or value. So, what should investors being doing now in preparation for the next crash? Our opinion is that investors should stockpile cash as the stock market increases. Use that cash for when the next stock market decline ensues. Educate yourself on investment values and be ready to hold your nose and buy those values at significant lows relative to prior peaks.