Let’s peer back to a time a few years ago to see if there are any similarities to today.
“Back then,” corporations were buying back their own stock as never before and pundits talked about the massive liquidity flowing into stocks.
“Back then,” the U.S. market hit new all-time highs in the first half of the year, although professional investors were skeptical since the strongest global economy was in Asia.
“Back then,” the economy was in the fifth year of an expansion, which is historically equivalent to about 10 dog years.
“Back then,” inflation fears were on the rise due to fear of mounting oil prices, and long-term bond yields were going up after a large drop.
“Back then,” the dollar and bond prices were dropping, and Washington politicians were threatening to raise taxes to reduce the deficit.
“Back then,” program trading was causing large swings in the market as the large pools of money moved in or out.
And finally “back then,” the post office announced the rate for a first class stamp was going to increase 3 cents.
“Back then” was 1987. It sounds a lot like today, doesn’t it?
Corporations are buying back stock-in fact, six times as much as they did in 1987-and China’s economy is the global darling vs. Japan in yesteryear. In 2007, we are in the fifth year of an economic expansion, inflation talk is rampant, and yields on longer-term bonds have started moving up.
This year, the majority of money managers have been skeptical and a bit reluctant to buy stocks, but since the majority of them underperformed the market last year, they have recently capitulated and joined the bulls.
Right now, hedge funds are playing catch-up and have the highest long-market exposure they have had in five years. Today, hedge funds represent about 20 percent of the total market volume, whereas, 20 years ago, it was program trading.
Politicians are all yakking about raising taxes and postal rates have increased, this time to 41 cents vs. 25 cents two decades ago. Twenty years ago next month, the Dow industrials busted through the 2,500 barrier and this year, the Dow hit new highs.
Then there was October 1987, when the market cracked 25 percent in one day. With all these similarities, are we in for a similar market crash this year?
Yogi Berra had the best answer for that question: “It’s tough to make predictions, especially about the future.”
Despite all the similarities, however, there are many differences. The market’s earnings yield is undervalued today and was overvalued then, the public isn’t enthused by stocks, and P/Es are lower.
I’m not sure it matters, though. In spite of that 1987 cataclysm, stocks were back hitting new highs just two years later.
If you are only looking back for guidance, it is like driving your car by gazing through the rearview mirror. Similarities to 1987? Some. Differences? A lot. Look through the windshield, but make sure your seat belt is on.
Gilreath is co-owner of Sheaff Brock Investment Advisors LLC, a money-management firm.Views expressed are his own. He can be reached at 705-5700 or [email protected]