Commentary: Several similarities between today's market and 1987 Crash
By Mark Hulbert, MarketWatch
Last Update: 7:26 PM ET Jan 21, 2008
ANNANDALE, Va. (Menafn - MarketWatch) -- The parallels between today's market and those preceding the 1987 Crash are several -- and disturbing.
Then, the dollar was in a free fall against foreign currencies. Today, as well. And then, as now, the U.S. government showed no signs of being particularly concerned.
Furthermore, over the October 1987 weekend prior to what would eventually become known as Black Monday, foreign stock markets plunged. The same is happening today too. (Read full story.)
It was obvious to almost everyone, prior to the market's opening on Oct. 19, 1987, that the Dow would have a terrible day. And sure enough, it did, losing 508 points.
U.S. stock markets likewise appear poised to have just as big a point loss this time around. As this is written, on Monday afternoon, the futures contract on the Dow Jones Industrial Average $INDU is off by some 520 points. (Read full story.)
Of course, the DJIA today is at a much higher level than in 1987. So this benchmark would have to drop more than 2,700 points on Tuesday to match the percentage loss from the 1987 Crash. This contrast may prove to be only small solace to beleaguered investors, though.
More solace may be provided by another parallel with the 1987 Crash, however: The crisis then was primarily confined to the financial markets; the economy as a whole, as judged by the scorekeepers at the National Bureau of Economic Research, was not then in a recession; nor was it about to enter into one.
To be sure, it would be premature to declare that today's economic slowdown will not develop into a full-fledged recession. But some of the newsletter editors I monitor do believe that the extent of any economic weakness is being exaggerated.
One such editor is Norman Fosback, editor of Fosback's Fund Forecaster. The latest issue of his newsletter was emailed Monday afternoon. And though Fosback does not focus specifically in that issue on the global markets' freefall over the past two sessions, his analysis speaks directly to the question of whether or not the crisis the markets face currently will be primarily confined to the financial markets.
Fosback suspects it will be relatively narrowly confined. "The prospective business slowdown does not appear all that serious," he writes. This is for a variety of reasons, the most important of which, according to Fosback, is the strength in the global economy:
"The global economy is plugging along in reasonably good shape, thanks in no small part to the weak U.S. dollar (that is even now boosting foreign demand for U.S. products), and thanks as well to the economic boom in the developing world (most significantly the emerging economic giants of China and India, that are providing an awesome supply of low-priced goods and services to U.S. consumers). This global economic boom is the golden egg for us all."
What about the subprime mortgage crisis? Fosback says its impact is being exaggerated too.
"As horrendous as seems the current round of write-offs by financial companies, these same firms profited immensely from the subprime boom in the first place, and are now merely giving back some of their gains. The great myth is that individual Americans were reaping the windfall benefit of absurdly low interest rates on their mortgages. This belies the fact that not only are the borrowers' mortgage loans secured with their own homes, but the average adjustable-rate subprime mortgage borrower is paying a 9% interest rate. That hefty consumer cost has produced, and is still largely producing, a lot of annual profit for the loan financiers. In the long run, these yields will offset all of the defaults, and in a very real sense the current default losses are simply one of the foreseeable costs of making the higher-risk loans in the first place."
The bottom line, according to Fosback: "The recession, if one even comes, should prove to be relatively mild. Although corporate earnings will certainly fall, this is not the doomsday end of the global business expansion."
Fosback deserves to be paid attention to because he has been a newsletter editor since the mid-1970s, more than three decades ago, and has a creditable track record. Among his noteworthy accomplishments is the creation of the stock market timing system that, far and away, has the best long-term track record of any that the Hulbert Financial Digest tracks.
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