Ten years ago Sunday-October 19, 1987-the U.S. stock market experienced its greatest single-day crash, when the Dow Jones industrial average fell 22.6%.
Though the crash's 10-year anniversary has many analysts speculating whether the market is due for another upheaval, an economist at Comerica Bank, Detroit, said he finds little support for a repeat of Black Monday soon.
"There are too few economic similarities between now and 1987 to portend a similar severe drop in the market," says Comerica vice president and economist William T. Wilson.
Mr. Wilson points to where the three key economic variables that affect equity values-interest rates, inflation, and gross domestic product growth- stand now compared with then.
"In short, the stock crash of 10 years ago was precipitated by rising inflation and interest rates," said Mr. Wilson.
"While the economy was expanding at a healthy 3% growth rate in 1987, inflation and interest rates were rising rapidly. In the year before the crash, the federal funds rate rose 1.5%, and the yield on the 30-year Treasury bond rose almost 2%. In addition, the inflation rate tripled from a low of 1.5% in 1986, to 4.5% by 1987. And the foreign exchange value of the dollar had fallen 9% in the year before the crash, pushing up import prices."
Today's economic environment is starkly different, Mr. Wilson noted. "While growing at a respectable pace, the U.S. economy now has stable interest rates and falling inflation: Long-term interest rates have fallen in the past year, and inflation, already running at a 30-year low, has fallen from last year."
"In the past year," he continued, "the Federal Reserve has raised interest rates just once, and by just a quarter percent. Moreover, the foreign exchange value of the dollar has risen more than 12% in the past year, pushing down dollar import prices and shaving an extra half percent from the inflation rate. These conditions are quite different from 1987."
Mr. Wilson added that the stock market has not undergone a correction of more than 10% in seven years-an all-time record. "While almost anything could trigger a correction, the similarities between now and the events leading up to Black Monday in 1987 just aren't there."
