Last week, we took a look at the Dow 10-day win streak and why it wasn’t as scary for future returns as many made it sound. That 10-day win streak also saw the Dow make 10 new all-time highs in a row, something that hasn’t happened since 1987. Could we have another 1987 on our hands? We’ll take a look and show why it may be unlikely.
When most investors hear “1987,” they immediately fear a 22% one-day crash is lurking. What is important to remember about that year though is the Dow was up 43% for the year as of late August, so some type of major snapback correction was incredibly likely. Also, the Dow did finish higher in 1987. Sure it was by only 2%, but most investors don’t realize that. So could another 1987-type correction be around the corner? We would say no, and the reason again is how stretched things were then versus now. After rising the first 13 trading days of 1987 (12 of them making new highs), the Dow gained nearly another 30% over the following eight months! With the Dow up about 6% so far in 2017, there’s a long way to go before it becomes as stretched as it was in 1987. That isn’t to say a normal correction after the big surge since the U.S. election isn’t possible, it is, but a major bear market correction is still something we’d call a low percentage scenario right now.
Per Ryan Detrick, Senior Market Strategist, “Markets might feel near-term extended, and they are by nearly any momentum oscillator* you want to use. But did you know that over the past 10 years, the Dow has been up only 5.4% on an annualized basis? Going back to 1900, the annual average return has been 5.1%. This puts in perspective how on a longer-term basis, the Dow could still have room to run should the economy continue to improve.”