Navigating Market Volatility: A Look at History and Current Conditions

The world of finance has seen its share of ups and downs, and one of the most memorable downs happened on October 19, 1987. Black Monday, as it’s now known, saw the Dow Jones plummet by a staggering 22.6% in a single day, resulting in a loss of $500 billion in market value. The S&P 500 fared no better, shedding over 20% in value. It was a historic crash that sent shockwaves throughout the financial world.

Fast forward to today, and there’s growing concern that certain market conditions are eerily reminiscent of those that led to the 1987 crash. Perhaps the most significant similarity is the unusual relationship between Treasury bond yields and stock prices. In both 1987 and the present day, we’ve witnessed rising bond yields coincide with stock market performance. Last week, the two-year Treasury note hit a 17-year high, boasting a yield of 5.2%.

Parallels in Bond Yields: 1987 vs. 2023

In a recent opinion column for Bloomberg, seasoned Financial Times analyst John Authers pointed out the striking resemblance between the yield spike curve for bonds in 2023 and that of 1987. While these similarities may send shivers down the spine of Wall Street, it’s essential to understand that they don’t necessarily presage an impending market crash.

To put things into perspective, corporate earnings in 2023 are reaching levels not seen in 15 months. Projections indicate that the U.S. economy remains surprisingly resilient, even in the face of persistently high inflation and rising interest rates.

Contrasting Macro Conditions

Comparing the macroeconomic conditions of 1987 to today further highlights the differences. In 1987, the situation was notably bleaker. Prior to the crash, the market had already endured a week of relentless losses, with declines exceeding 10%. Interest rates were substantially higher, and inflation was on an upward trajectory.

John Authers acknowledges that while the parallel between rising bond yields and equities is concerning, it doesn’t guarantee an impending market catastrophe. However, he concludes that it’s reasonable to expect that something in the financial landscape will need to adjust.

Recent Market Movements and Outlook

Recent market movements underscore the significance of bond yields. Just last week, the 10-year U.S. Treasury yield surpassed 5% for the first time in over 16 years, causing ripples in the stock market. Fed Chairman Jerome Powell’s remarks reinforced the notion that interest rates might remain elevated for an extended period, adding to the market’s unease.

Throughout the week, major indices recorded losses, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all in the red. In the world of earnings, American Express reported record quarterly results, driven by robust spending and demand for high-fee credit cards. However, increased provisions for credit losses raised concerns about an economic slowdown, causing a 5.3% drop in American Express shares.

Yields and Geopolitical Tensions

Bond yields continued to be in the spotlight last week, with significant upward momentum. The persistent elevation of yields has raised concerns among central bankers about potential negative impacts on the economy. Additionally, escalating tensions in the Israel-Palestine conflict have left risk assets jittery.

Currency Market Fluctuations

The U.S. Dollar experienced a slight dip, ending a period of consecutive gains. While it retreated by 0.5%, it remained on an overall upward trajectory. The Euro saw a favourable week, gaining ground against major currencies, while the Pound responded to mixed data. The Pound’s performance against the Euro fluctuated around the key level of 0.872 but ultimately closed below it.

Commodity Currencies and Safe Havens

Commodity currencies faced headwinds as risk-off sentiment prevailed and yields continued to rise. The Australian Dollar bucked the trend with a 0.2% gain, while the New Zealand Dollar and Norwegian Krone declined by approximately 1%. The Canadian Dollar also weakened, falling 0.4% against the U.S. Dollar. Safe-haven flows boosted the Swiss Franc, leading to a 1.1% rally, while the Mexican Peso and Japanese Yen experienced slight declines.

Oil Prices and Precious Metals

Oil prices remained strong, especially amid the volatile situation in Gaza. West Texas Intermediate (WTI) oil rose by 0.7%, closing at $88.28. Precious metals had another robust week, attracting safe-haven flows. Gold surged by 2.5% to reach $1,980, coming tantalisingly close to its all-time highs. Silver also posted significant gains, closing at $23.36 after a nearly 3% increase.

Equities in the Face of Uncertainty

Equities continued to grapple with geopolitical uncertainty but have yet to exhibit a significant technical breakdown. Despite a 2.4% drop in the S&P 500, which closed at 4215 points, it remained above the critical support level of 4200. Meanwhile, the DAX fell by 2.5%, closing at 14,774 points.

Bonds and the Mystery of Yields

The rally in bonds from the previous week seemed to have faded as selling resumed. A substantial volume of U.S. issuance is anticipated in the coming weeks, likely contributing to the ongoing demand for yields. The 10-year U.S. Treasury yield surged by 29 basis points to reach 4.92%, while the 10-year Bund fell by 1.3%, closing at 127.981.

Looking Ahead

The situation in Gaza will continue to be a focal point in the coming week, with hopes for de-escalation. Yields are trading at elevated levels given the current macroeconomic backdrop, increasing the risk of a sharp downturn.

On the economic data front, expect the release of Manufacturing and Services PMI data, interest rate decisions from the ECB and Bank of Canada, and the essential U.S. Core Personal Consumption Expenditures (PCE) data.

Earnings season is in full swing, including notable reports from the UK banking sector for Q3 and heavyweights like Amazon (AMZN), Microsoft (MSFT), Meta Platforms (META), Coca-Cola, AbbVie (ABBV), and Chevron (CVX).

Key drivers will be earnings outcomes and the ongoing war in the Middle East, as Israel delays its ground invasion of Gaza, prioritising diplomatic efforts to free hostages, sending oil lower.

In conclusion, while historical parallels and current conditions may raise concerns, it’s crucial to remember that markets are influenced by numerous factors. Stay informed, adapt to changing conditions, and consider appropriate strategies as you navigate the ever-evolving landscape of finance. Consult with our financial advisers for personalised guidance tailored to your unique financial goals and circumstances.

As always, for personalised insights and guidance tailored to your unique financial situation, we encourage you to reach out to our financial advisers.

Sources: Reuters, Bloomberg, CNBC and Financial Times

FAQs

1. What Is “Black Monday” in Financial History?

Black Monday refers to October 19, 1987, when the Dow Jones Industrial Average experienced a historic crash, plummeting by 22.6% in a single day. It resulted in a loss of $500 billion in market value, and the S&P 500 also saw a significant decline of over 20%.

2. What Are the Concerns About Market Conditions in 2023?

In 2023, some market conditions bear similarities to those preceding the 1987 crash. Notably, there is an unusual correlation between rising Treasury bond yields and stock market performance. The two-year Treasury note, for instance, reached a 17-year high with a 5.2% yield. These parallels have raised concerns.

3. Is History Repeating Itself in Terms of Bond Yields and Equities?

There are indeed parallels between the current yield spike in bonds and that of 1987. However, it’s crucial to note that historical similarities do not guarantee an impending market crash. Market conditions are influenced by various factors.

4. What Factors Differ Between 1987 and Today’s Market?

Unlike 1987, the current macroeconomic conditions are more favorable. Corporate earnings have reached a 15-month high, indicating the resilience of the U.S. economy. In 1987, macroeconomic indicators were less promising, with higher interest rates and accelerating inflation.

5. Why Are Bond Yields Considered Significant?

Bond yields are closely monitored as they impact economic conditions. Rising yields, especially over an extended period, can negatively affect economies and are a concern for central bankers.

6. How Did Recent Market Movements Reflect These Concerns?

Recent market movements have been influenced by rising bond yields. Last week, the 10-year U.S. Treasury yield exceeded 5% for the first time in over 16 years. This raised apprehensions, leading to stock market declines.

7. What Role Did Fed Chairman Jerome Powell Play in Market Sentiment?

Fed Chairman Jerome Powell’s comments contributed to market sentiment. He indicated that interest rates might remain elevated for an extended period, which had a bearing on stock market performance.

8. What Were the Key Market Indices’ Performances Recently?

Major indices, including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, recorded losses recently. The Nasdaq exhibited the most significant decline.

9. How Did Corporate Earnings Affect Markets?

While corporate earnings, particularly those of American Express, showed strong results, increased provisions for credit losses raised concerns about economic slowdown.

10. Why Are Safe-Haven Assets Like Gold and Silver Gaining Traction?

Safe-haven assets like gold and silver have gained popularity due to market uncertainty. Investors often turn to these assets in times of geopolitical instability or economic concerns.

11. What Are the Concerns About Bond Markets?

Bond markets have experienced substantial selling recently. The ongoing issuance of U.S. bonds is one of the factors contributing to the demand for yields.

12. What Should Investors Watch for in the Coming Weeks?

In the weeks ahead, it’s essential to monitor geopolitical developments, especially in the Israel-Palestine conflict. Yields are trading at elevated levels, increasing the risk of a significant downturn. Additionally, keep an eye on key economic data releases and earnings reports from prominent companies.

13. How Can I Stay Informed and Make Informed Financial Decisions?

Staying informed about market conditions and adapting to changing circumstances is crucial. Consider consulting with our financial advisers who can provide personalised guidance tailored to your financial goals and unique circumstances.

If you have specific questions or concerns about your investments, don’t hesitate to reach out to our financial advisers for personalised guidance and recommendations.