Forget 1987: This is the market's relevant precedent
The market crash worth thinking about today is not the one that happened on this date in 1987 – the violent rupture that cost the Dow (^DJI) 22% in one day.
The slower, less severe but still painful global mini-crash of 2011 is the one that might have at least a bit of relevance for today’s situation.
The ’87 crash was a moment of brutal comeuppance for a market that was heedless and exuberant until a few months earlier. Stocks were up 40% for the year before starting to sputter in August.
This year has more closely resembled 2011 – a mostly sideways crawl as stocks digested prior years’ gains, until global credit and growth anxiety smothered fragile risk appetites that summer.
At this point in 2011, the S&P 500 (^GSPC) was down just over 2% year to date, having followed world markets lower in a nasty August-September setback and then recovered some lost ground. Right now, the index is off slightly more than 1% for the year, having recouped a bit more than half the 12.4% late summer drop.
The psychological rescue in 2011 came when a feared European default was forestalled by central-bank jawboning and the Federal Reserve’s balance sheet expansion. This year, reduced expectations of a Fed rate hike and the persistence of weak but positive growth is so far supporting risk assets.
The bears who have now been put on the defensive by stocks’ extended bounce will tell you the lead-up to the 2015 correction was full of blithe speculation of the sort that occurs near major market tops. But not really.
If the May 2015 peak were to prove the end of the bull market, its final six months would prove among the weakest finales ever for a postwar uptrend.
Get the Latest Market Data and News with the Yahoo Finance App
And the broader mood today is thick with conspicuous sobriety and investors coveting safety to excess. The IPO Index has rolled over in a serious way, showing hostility toward fresh new stocks. This would happen at a market top but it surely doesn’t imply dangerous exuberance.
Indeed, the world’s hottest IPO of recent weeks is today’s oversubscribed debut of the Japan Post Bank – the post office arm that takes the copious deposits of Japan’s aging and risk-averse population to place mostly in Japanese government bonds with miniscule yields. Hardly a hopes-and-dreams speculation.
The news today also tells of U.S. banks refusing to take companies’ interest-free deposits, so heavy are they with inert reserves. Again, this is a distortion of zero-interest-rate policies, but does not speak to recklessness run amok.
Too much can be made of historical analogies, and perhaps I’ve already made too much of the 2011 one. Yet if this market continues to rhyme with that one, it’s worth noting that there was another October gut check before a strong finish to produce an almost perfectly flat year for the S&P 500 in 2011.
This year, we’re experiencing a corporate profit recession without serious signs of an overall recession. In the short term, this rally looks a bit ahead of itself, but trader attitudes are just starting to lift from deeply depressed levels, so nothing dramatic needs to happen to allow stocks to hold most of their recent gains. A perfectly flat performance for 2015 would mean the S&P would rise another 1% from here by New Year’s.
Stocks are valued neither cheaply nor very expensively given the broader environment, leaving their fate to be determined by credit markets and the prospects for non-energy, non-financial profit expectations into next year.
In other words, it leaves them where they’ve been for months now, if not years.
More from Yahoo Finance
The nagging question for investors: Is 2% enough?
It's still a bull market and Cisco's a buy: TIAA-CREF's Malik
This rally deserves respect, though Nasdaq weakness glares
