Stock market is exhibiting unsettling parallels with the events leading up to the 1987 crash, and financial experts like Societe Generale strategist Albert Edwards are sounding the alarm.
Edwards has raised concerns about the stock market’s resilience in the face of rising bond yields, which have been climbing steadily due to expectations of an extended period of higher interest rates by the Federal Reserve.
The 10-year US Treasury yield reached a 16-year high, hitting approximately 4.768% on a Tuesday.
Despite this surge in bond yields and significant losses in August and September, US stocks have remained relatively strong throughout the year, with the S&P 500 still up 10% from January.
However, Edwards believes this resilience could be masking deeper issues, drawing comparisons to the period leading up to the infamous Black Monday crash of 1987.
During that time, stocks remained robust despite rising bond yields, only to plummet by a staggering 22% in a single trading session.
“The equity market’s current resilience in the face of rising bond yields reminds me very much of events in 1987 when equity investors’ bullishness was eventually crushed,” Edwards cautioned. “Just like in 1987, any hint of recession now would surely be a devastating blow to equities.”
Adding to the uncertainty is the growing ambiguity surrounding the economic outlook.
Stock Market Alarms Ring Amid Recession Worries
Economists’ forecasts have been wavering throughout the year, with some initially anticipating a soft landing for the economy in mid-2023.
However, the recent surge in bond yields has cast doubt on that projection.
Albert Edwards expressed his concerns about the economic cycle, saying, “Never in my career have I witnessed such uncertainty about where we are in the economic cycle. Is that long-promised recession still lurking around the corner, or are we at the start of a new economic cycle?”
There are indeed warning signs on the horizon.
According to Raymond James, a weakening labor market combined with consumers depleting their pandemic-era savings could push the economy into a turning point as early as this quarter.
Moreover, the New York Fed has indicated a 61% probability of the US entering a recession by August 2024.
Additionally, Yale’s US Crash Confidence Index reveals that only 32% of individual investors believe the likelihood of a 1987-style stock market crash in the next six months is less than 10%.
In light of these concerns, investors and market observers are closely monitoring the evolving economic landscape, aware that any sign of recession could trigger a substantial sell-off in equities, potentially mirroring the events of 1987.