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  1. #1
    WHT-BR Top Member
    Data de Ingresso
    Dec 2010

    [EN] 30 years after Black Monday, could markets crash again?

    Wall Street’s crash in 1987 has an ominous parallel with today’s global markets

    2017 - Never in history have interest rates been so low, share prices been so high and debts been so massive.

    Nicholas Spiro
    19 October, 2017

    Thursday marks the 30th anniversary of “Black Monday”, the stock market crash on October 19, 1987 when US stocks plunged more than 20 per cent, their sharpest-ever one-day decline.

    Not surprisingly, equity market bears are drawing parallels between the dramatic sell-off in 1987 and today’s frothy conditions in US stock markets which are enjoying their second-longest bull run ever and which are in bubble territory according to most valuation measures.

    Richard Thaler, a University of Chicago professor who last week won the Nobel Prize for economics, echoed the views of many market commentators when he told Bloomberg TV: “We seem to be living in the riskiest moment of our lives and yet the stock market seems to be napping. I admit to not understanding it.”

    The disconnect between asset prices and macro-political and policymaking developments is indeed striking. While there are numerous examples of market mis-pricing, the three most important ones are:

    US monetary policy: The Federal Reserve and the bond market are sending contradictory signals. While markets are currently assigning an 87 per cent probability to another interest rate hike in December, bond investors and Fed policymakers differ sharply when it comes to the outlook for monetary policy in 2018.

    While the Fed anticipates three more rate hikes next year, futures prices are assigning a more than 50 per cent probability to rates remaining unchanged by June and an 8 per cent chance that they will be lowered by then. Even by September, the highest odds (nearly 40 per cent) are for just one 25 basis point hike.

    As Datatrek Research, an economic consultancy, notes: “Why the split between Fed commentary and market pricing? One word: inflation.” Markets believe the Fed is far too optimistic on the path of inflation, increasing the risk of a major “policy mistake” if the Fed tightens (or is perceived to tighten) prematurely. Add to this the uncertainty surrounding both the prospects for US tax reform and the new leadership at the Fed once Chairwoman Janet Yellen’s term ends in February, and the discord between markets and the Fed could increase further.

    Political risks: How much more political risk will it take for markets to come under significant strain? The growing disconnect between mounting political and geo-political threats to sentiment and elevated asset prices is one of the clearest signs of complacency in markets. The insouciance is all the more striking given the potential for politics to influence asset prices.

    The British pound has become, in the words of HSBC, a “political currency” whose performance is heavily determined by the twists and turns in Britain’s arduous negotiations to leave the European Union. Bullish bets on sterling – which shot up 11.6 per cent against the dollar between early March and early September – have already backfired, with the pound down more than 3 per cent over the past month because of the mounting risk of the UK crashing out of the EU with no trade deal in place. Make no mistake, Brexit risk is being significantly underpriced.

    The mother of all political risks, Donald Trump’s crisis-ridden presidency, is even more underpriced given its far-reaching implications for monetary policy (Trump is now considering whom to appoint as Fed chair), trade policy, foreign policy (particularly towards North Korea) and, most importantly, domestic politics.

    Ultra-low volatility: The most worrying disconnect, however, is the dramatic decline in financial volatility to historically low levels despite the plethora of risks confronting markets and the global economy. The evaporation of volatility has had a profound impact on markets, encouraging investors to place huge bets on volatility remaining subdued.

    While these bets, known as “shorting vol” in Wall Street slang, have proved extremely profitable over the past several years, a sudden reversal of short volatility trading strategies – which have become one of the most crowded trades – would exacerbate the sell-off as investors scramble to buy protection against sharp declines in asset prices.

    Yet so convinced have investors become that every bout of market turbulence will be quickly followed by a long period of calm that they continue to ratchet up their bets that the tranquillity will persist. At some point, however, short vol trading strategies will backfire spectacularly, amplifying selling pressures and increasing the risk of a full-blown financial crisis.

    While asset prices could remain elevated for some time yet, the removal of monetary stimulus by the world’s leading central banks will stretch the resilience of markets to breaking point.

    Few investment strategists see another Black Monday in the offing, yet the disconnect between markets and fundamentals is becoming more troubling with each passing day.

  2. #2
    WHT-BR Top Member
    Data de Ingresso
    Dec 2010

    30 years after Black Monday, what could slow this bull run?

    Stan Choe
    Oct 18, 2017

    How long can this nirvana last for investors?

    The stock market keeps ticking methodically higher into record territory, and the Dow Jones industrial average closed above 23,000 for the first time on Wednesday. It's been nearly 16 months since S&P 500 index funds had a pullback of even 5 percent over the course of days or weeks, the longest such streak in two decades.

    Many analysts expect the market to keep climbing, at least for the next year. The global economy is improving, corporate profits are rising and inflation remains low but not so low that it makes economists nervous.

    But as investors learned so painfully 30 years ago, markets can shift quickly. On Oct. 19, 1987, the S&P 500 plummeted 20.5 percent to wipe out what had been sizeable gains for the year.

    Virtually no one is predicting a repeat of "Black Monday," which was the stock market's worst day in history and happened when conditions were different from today. But several worries are circulating underneath the market's placid surface. While they may not cause a 20 percent drop in one day, they could be the spark for the market's next drop of 5 percent or more, whenever it ends up happening.

    Here are a few potential stumbling blocks for a stock market that's more than tripled since its 2009 bottom in the Great Recession, including a surge of 20 percent over the last 12 months:

    — Stocks are expensive. Even the most optimistic analysts wouldn't call the market cheap. Stock prices tend to follow the trend of corporate profits over the long term, but stocks have been rising more quickly than earnings recently. The S&P 500 is trading at 31 times its average earnings over the last 10 years, after adjusting for inflation, according to data compiled by Yale economist Robert Shiller. That's the highest level since the summer of 2001, when the dot-com bubble was deflating.

    By themselves, stock prices rising faster than earnings aren't enough to cause markets to buckle. The stock market stayed at or above this level of price-to-earnings for years following the summer of 1997. But they're enough to give some strategists pause.

    — The Fed is tightening. The Federal Reserve slashed short-term interest rates to near zero in response to the 2008 financial crisis. It also took the unprecedented step of purchasing trillions of dollars of bonds to keep rates low. Those low rates meant bonds were paying little in interest, and investors moved into stocks in search of greater returns.

    Now the Fed is slowly pulling back. This month it started paring back its $4.5 trillion in bond investments. And many investors expect the central bank to raise short-term interest rates at its meeting in December, which would be the third increase this year.

    Higher interest rates make borrowing more expensive for companies, and those bigger interest payments could erode profits, at least modestly. Some investors are even talking about the slim possibility that the Fed will raise rates more quickly than it anticipates, if inflation picks up from its current slow pace. "Our downside scenario is that inflation becomes too hot and central banks wake up to the fact that they're behind the curve," said Jon Adams, senior investment strategist at BMO Global Asset Management.

    — The leadership of the Fed may soon change. Janet Yellen's term as chair of the central bank expires in February, and whoever sits in the seat next will have great influence over how quickly the Fed moves. President Donald Trump said he'll likely choose from a field of five candidates, one of whom is Yellen.

    Many analysts and investors expect the next chair to stick to the Fed's announced schedule for bond-investment reductions, but any uncertainty could unnerve investors.

    — Tax reform may fail, or the dollar may jump in value. Stocks have recently received a boost from rising expectations Washington will be able to cut tax rates. Lower taxes could mean bigger profits for companies and likely launch another round of stock repurchases by businesses. But if Washington stumbles, the disappointment could drag down stocks.

    Strategists at Goldman Sachs say the S&P 500 may end the year at 2,650 if tax reform passes, which would be a roughly 3.5 percent gain from Tuesday's close. But if reform doesn't happen by then, the index may end the year at 2,400, down 6.3 percent from Wednesday's close of 2,561.26.

    If the dollar jumps in value, meanwhile, it would cut into the profits that multinationals have been making from their overseas sales.

    — North Korea and other hotspots around the world remain big unknowns. Analysts call this "geopolitical risk," and one of the reasons it's so scary for investors is that it's not possible to predict.

    "There are a lot of dangerous things going on," said John Vail, chief global strategist at Nikko Asset Management. Besides the worsening war of words between North Korea and the United States, he listed Ukraine and Syria as other areas with the capability of drawing the world's big powers into conflict.

  3. #3
    WHT-BR Top Member
    Data de Ingresso
    Dec 2010

    Could the 1987 stock market crash happen again?

    In response to the 1987 crash, the U.S. SEC mandated the creation of market-wide “circuit breakers” that call a temporary halt to trading after the Dow declines 10, 20 and 30 percent. Only one market-wide halt has been triggered since then, in 1997.

    John McCrank, Chuck Mikolajczak
    October 19, 2017

    On the 30th anniversary of the 1987 stock market crash, U.S. stocks are at a record high and investors are concerned that steep valuations may mean a correction is overdue, despite healthy corporate earnings and economic growth.

    But could a repeat of “Black Monday” happen today? Modern trading technology, changes to the way stock exchanges operate and in the way investor funds are managed should make a repeat of the 1987 crash unlikely. Yet cautious traders refuse to rule it out.

    “We have learned a lot from the mistakes of the past in terms of the reaction or over reaction,” said Ken Polcari, director of the NYSE floor division at O‘Neil Securities in New York.

    On Monday Oct. 19, 1987, following large declines on Asian and European markets the previous week, the Dow Jones Industrial Average plunged 508 points, or 22.6 percent, for the biggest-ever single day decline in percentage terms by the blue-chip benchmark.

    A decline of up to 20 percent in one day is possible today, but it would likely be a more orderly process, said Art Hogan, chief market strategist at Wunderlich Securities in New York.

    “We have the ability to shut things down for a period of time and reassess and try to ascertain what is the best way to get back in business and take a calmer look at things,” he said.

    In response to the 1987 crash, the U.S. Securities and Exchange Commission mandated the creation of market-wide “circuit breakers” that call a temporary halt to trading after the Dow declines 10, 20 and 30 percent. Only one market-wide halt has been triggered since then, in 1997.

    The circuit breakers were adjusted in 2012, lowering the thresholds needed to trigger a trading pause, with the Dow replaced by the S&P 500 stock index as the benchmark index.

    Under current rules, if the broader S&P 500 index falls more than 7.0 percent before 3:25 p.m. New York time, trading is paused for 15 minutes. If the decline continues once trading resumes, and it is still before 3:25 p.m., the market is again paused at 13 percent. If the decline happens after 3:25 p.m, trading continues. But if the decline reaches 20 percent, trading is suspended for the session, regardless of the time of day.

    “The industry has come an awfully long way from ‘87,” said Larry Tabb, who heads capital markets advisory firm TABB Group.

    “The regulators have done a good job at implementing rules that help the markets ensure that they stay stable at a time when there is not a reason for them not to be stable.”

    Many of the current measures aimed at taming market chaos were implemented after the May 2010 “flash crash,” when the Dow Jones Industrial Average careened nearly 1,000 points, around 9.0 percent, in a matter of minutes before mostly rebounding in a similarly short period.

    The SEC approved a regulation in 2012 called “Limit-Up Limit-Down,” which prevents stocks from trading outside of a specific range based on recent prices, pausing trading in the stocks in question when prices run afoul of the bands.

    The U.S. regulator and exchanges were forced to readjust the bands again, and the re-opening procedures for paused stocks, after a chaotic trading session in August 2015. Then, concerns over the health of the Chinese economy led to panic-selling and a dearth of buyers, spurring a record intra-day drop in the Dow.

    On that day more than 1,250 trading halts in 455 individual stocks and exchange-traded funds spawned confusion that may have compounded the problem and led to some investors getting worse prices than they otherwise would have.

    “Anything is possible,” said Peter Costa, president of Empire Executions Inc in New York. “With the advent of computer technology and the speed at which that technology has transformed the market, it is very possible.”

    The safeguards in place would likely prevent another 1987- style crash from taking place, but with the Dow hitting a frothy 23,000 points for the first time ever on Wednesday this week and the advent of high-speed automated trading, some traders are not so sure.

    “Could it happen, something similar to that?” asked Gordon Charlop, a managing director at Rosenblatt Securities in New York. “Yeah. How will it pan out and what will be the outcome? That is why they play the game.”

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