“Well, it has been about eight months since we were last told ‘now looks just like 1987,’ so it is about time for those scary charts to pop back up,” per Ryan Detrick, Senior Market Strategist. Every so often these popular charts make their way around trading desks, create waves on social media, and find their way into financial articles. Sure enough, there’s another chart making the rounds, and here it is:
One of these charts last circulated before the U.S. election and we noted at the time why a crash was highly unlikely. Since then, the S&P 500 Index has added 14% and made 22 all-time highs in 2017. This wasn’t the first time one of these charts circulated. In both 2013 and 2014 we were told “now is just like 1987,” and who could forget the “now is just like 1929” charts from early 2014?
Simply lining up one line with another line isn’t how we’d advise to go about your investing. “Just like the guy who cut his grass in the middle of a tornado, sometimes we can get too focused on one thing and miss the big picture. Using one chart to suggest a major crash is coming is borderline ridiculous, as there are so many other factors to consider,” said Detrick.
It’s also helpful to look at fundamentals, valuations, technicals, and sentiment to formulate a well-informed market opinion. Don’t be the guy above and get carried away with the latest “now is just like 1987 chart,” look at the big picture.
As we’ve previously discussed, one big difference between now and 1987 is the returns heading into that event versus now, i.e., on a percentage basis, the picture is turned completely on its head and doesn’t show any similarities with 1987. Stocks were up close to 40% year to date in early September 1987. That is one thinly stretched rubber band. The reality is the S&P 500 is in a bull market, but over the past two and a half years it hasn’t been anything out of the ordinary. In fact, from 1985 to the peak in 1987, the S&P 500 was up close to 100%. Over this similar timeframe, the S&P 500 today is up only about 20% higher.
“No two times are ever the same. Charts that compare one year with another might cause a good deal of excitement and generate page views, but the reality is no two periods of time are ever similar,” concluded Detrick.