Traders fear another Black Monday — market data says don’t worry

Today is the anniversary of Black Monday, 1987. However, despite countless traders getting spooked over the weekend by suggestions of a repeat performance, today is completely different.

For example, index futures pricing late yesterday evening indicated mildly higher prices for Dow contracts up 0.1% — a far cry from the Dow’s 22.6% plunge on October 19, 1987.

Despite little to no pricing evidence of an impending market crash, traders seemed to latch onto the idea of a bear market in AI stocks, enamored with a viral essay about a “stealth” bear market supposedly festering within otherwise bullish indices like the S&P 500.

Market commentators posted calls for a Black Monday, racking up millions of combined views.

In contrast to 1987, today’s market isn’t already in freefall. In August 1987, the Dow peaked at 2,722 and had lost about 17.5% by the Friday close before the crash. 

Today’s Dow, however, is within 4.5% of its all-time high. The S&P 500 is similarly within 2% of a record high today.

The pace of declines prior to today is also bad news for doomsayers who think today will end in catastrophe.

In 1987, the Dow had already crashed more than 10% during the three sessions prior to Black Monday, whereas today’s S&P 500 hasn’t been crashing at all prior to two trading days ago.

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No pre-crash, portfolio insurance, or other 1987-like features

Secondly, today’s market doesn’t have two mechanisms that allowed Black Monday of 1987: portfolio insurance selling and circuit breaker-free trading. 

Portfolio insurance, a faddish type of pre-determined stop-losses for investment portfolios in the 1980s, sold futures mechanically during the Black Monday crash of 1987.

In fact, US President Ronald Reagan appointed the Brady Commission to investigate Black Monday, and the report blamed portfolio insurance as one of the primary sellers that Monday.

Moreover, stock exchanges in 1987 didn’t have modern circuit breakers. Modern stock exchanges, as opposed to Black Monday markets, will trigger a 15-minute pause in trading after a 7% S&P 500 slide.

In addition, a 20% decline will close US stock markets for the day. 

Yes, it is literally impossible for the US stock market to repeat a Black Monday drop of 22.6% today, because S&P 500 declines of more than 20% cannot process on US stock exchanges within a single trading day.

In addition, today’s S&P 500 index isn’t even particularly overvalued in comparison to Black Monday of 1987.

Today’s index trades at an estimated 26 times trailing earnings — only modestly higher than the S&P’s 23.3 multiple at its 1987 peak.

Lastly, companies in today’s S&P 500 are growing earnings 29% annually as of their most recent quarter, on average, with FactSet estimating constituents are reporting their third consecutive quarter above 25%.

This contrasts with Black Monday of 1987 when companies had reported essentially flat earnings between −1% and +4% year-over-year across the three quarterly reports before the crash.

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