Ever since I wrote “Six similarities between now and 1987, when the Dow plummeted 23% in one day,” I have been getting a steady flow of requests from investors to write about the differences.

Let’s explore that.

The six differences

Please click here for a table showing the differences between the stock market today and in 1987.

As background, the S&P 500 Index is on pace to rise for a 12th consecutive month. It’s up 14% this year. Volatility is at record lows.

The ’87 crash led to the implementation of robust circuit breakers, which halt trading if prices fall to certain levels. For example, if the S&P 500 SPX  falls 7%, trading is halted for 15 minutes unless it occurs after 3:25 p.m. The second halt comes at a 13% level. If the market falls 20%, trading is suspended for the rest of the day.

Circuit breakers also apply to stock index futures that trade on the Chicago Mercantile Exchange (CME).

In 1987, portfolio insurance triggered automated selling when the market fell through pre-specified points. The result was selling begat more selling. There is no such simple automated selling based on pre-specified points these days. Automated selling these days is very complex.

In 1987, monetary policy was tight; interest rates on 30-year U.S. Treasury bonds had risen to 10%. Now the central banks are accommodative and interest rates are near historic lows.

In 1987, interest rates were being raised to control inflation. Now inflation is low.

Some will find the sixth difference controversial. President Trump has tied his presidency to the stock market. Trump is always boasting how much the stock market has risen since his election…Read more at MarketWatch



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