Investors
P: 1800 658 404
View full details
Financial advisers
Contact your state account manager or our client services.
View full details
Shopping Centres
For leasing, casual leasing and brand solutions enquiries
Contact Us
Connect with us to stay up to date with news and updates.

LinkedIn

What can we learn from Black Monday?

Valuations, as measured by simple PE ratios, are certainly comparable to valuations right before the massive 1987 correction that left investors reeling and portfolios underwater the ensuing two years.



The 30th anniversary of the 1987 share market crash this week certainly gives us pause for reflection on the state of share markets and asset prices today.

Valuations, as measured by simple PE ratios, are certainly comparable to valuations right before the massive 1987 correction that left investors reeling and portfolios underwater the ensuing two years.

However, as experts will recall as they reflect on the so-called Black Monday event, there’s not the same exuberance or “feeling” around today like there was leading up to October 19 three decades ago and there are some big differences in terms of much lower inflation and interest rates today making valuations look more reasonable.

While the cyclical bull market in US shares is no less than eight and a half years old – the second longest run since World War Two and the second strongest in terms of gains – the signs that pointed to the crash in the late 1980s aren’t as evident, says Dr Shane Oliver, AMP Capital Head of Investment Strategy and Chief Economist.

What’s different?


“Overall, we are still not seeing the excess, euphoria and exhaustion that typically come at cyclical economic and share market peaks ahead of recessions and deep bear markets,” he says.

“So, barring some sort of external shock, the cyclical bull market in shares looks like it still has further to go,” Oliver reckons.

Compared to 1987, the gains over the past 12 months have been more modest and, while forward price to earnings ratios are at least the same or higher in the US, this is justified given far lower inflation and bond yields and real dividend yields are far more attractive, Oliver notes.

A look down the list of comparisons between valuations and market conditions now compared to the 1987 peak and there are clearly some differences but also some eerie similarities.

For one, the average forward price earnings multiple of the US share market is higher than it was at the pre-1987 peak.



 

It’s also noteworthy that share markets had already started to break down before the October 19 1987 crash whereas that has not happened now, Oliver notes.

As an aside, despite the 1987 crash, economic growth was barely impacted and so shares moved higher in 1988 and 1989, he says.

What have we learned 


First, corrections should be anticipated.
 
With Trump, North Korea and the Fed being potential triggers along with the fickleness of investor confidence we can’t rule out another crash like in 1987, Oliver notes.

That said, we still appear to be a long way from the peak in the investment cycle, Oliver adds.

Second, non-US share markets and economies are less advanced in their cycles and provide opportunities for investors, Oliver notes.

Finally, it’s worth noting that several bad years (1987 and 1929) have given Octobers a bad wrap globally. 

While historically October has been a soft month in Australia – with shares down an average 0.3 per cent since 1985 in October – they have actually been positive in the US, up 1 per cent on average.
Taking your SMSF to the next level
Download free ebook

Sign up to our newsletter!

Receive regular insights and marketing communications including a weekly update of trending news and market insights that are tailored for SMSF trustees and investors.
AMP's Australian operations are bound by the current Australian privacy legislation which outlines how organisations should manage and use personal information collected and held about their customers. AMP Privacy Policy
Sign me up Not right now. Thanks

Sign up to our newsletter!

Receive regular insights and marketing communications including a weekly update of tending news and market insights that are tailored for SMSF trustees and investors.
AMP's Australian operations are bound by the current Australian privacy legislation which outlines how organisations should manage and use personal information collected and held about their customers. AMP Privacy Policy
Sign me up