The S&P 500 Index closed at 1987.01 last Wednesday, July 23, an all-time high that has since been surpassed. That particular level seems like a terrific coincidence, given some investors’ concerns that another 1987 (the year) is right around the corner. Is it really déjà vu all over again?
1987 is, of course, most infamous among investors for Black Monday, when the S&P 500 dropped more than 20% amid a global stock market crash. As the chart below shows, the index had been rising almost 20% annually from 1982 to 1986—a rate similar to the growth we’ve seen over the last five years. And as with the current rally, the tremendous bull market had its roots in the ending of a deep recession. In reality, however, the comparisons between then and now are quite superficial.
Source: Bloomberg, 7/24/14. Past performance does not guarantee future results.
Back in 1987, inflation was above 4% and climbing, and the Fed had started tightening monetary policy the year before. Today, inflation is just over 2%—a very modest rate by historical standards—and the Fed is still buying Treasuries and mortgage securities. The Fed continues to “taper” its large scale asset purchases, but outright interest rate hikes are still likely a long way off. “Low rates for long” is, and will remain, the name of the game.
For the current market environment to change, the monetary policy regime has to change. And for the monetary policy regime to change, cyclical pressures have to build to an unsustainable level. So far, there is scant evidence of that happening. Amid lackluster GDP growth, we’re seeing none of the excesses that have typically ended bull markets in the past: not in valuations, not in credit growth, not in general price levels, not in wage growth. We’re not even seeing it in investor participation. Only recently, after five years of fantastic performance, have retail investors finally begun to return en masse to equity markets.
To be clear, contrary to popular myth, a modest Fed tightening (whenever it does come) does not constitute a monetary policy regime change. It would simply be the Fed taking its foot off the gas pedal. Monetary policy regime change—and transitively, a market environment change—requires the Fed to actually hit the brakes, as it did in 1987. In my view, this is not on the horizon in the U.S. and most certainly won’t be the case globally anytime soon.
The S&P 500 Index is a broad-based measure of domestic stock market performance. The Index is unmanaged and cannot be purchased directly by investors. Past performance does not guarantee future results.