Everyone is talking about whether it is 1987.
In 1987, stocks shed 31%, although GDP accelerated and earnings kept growing. A similar story is present today – GDP is likely to have accelerated in 3Q, earnings are still growing, albeit at a considerably lower pace, and stocks are jittery.
There are, of course, important differences between 1987 and today.
Here’s a look a 6 macroeconomic variables and how they performed in 1987.
The top left is bond yields. In 1987 yields jumped from around 7.2% to 9.1%, a jump of 26%. In contrast, yields are not about to jump in today’s environment.
The middle-top left is the CPI. From the start of 1987 to the end, inflation more than doubled, going from 2% to over 4%. Interestingly, and although mistaken, many central bankers are concerned about disinflation (falling inflation) or deflation.
The middle-bottom is the Federal Funds Rate. The Fed was ahead of the curve in 1987, raising rates from 6% at the start of the year to 6.8% at the end. In contrast, today’s uber-dovish Fed is nowhere near considering any rate increases. Instead, a more likely outcome is QE4 before any rate increase above 0.25%.
Real GDP in 1987
The bottom-left chart is Real GDP. In 1987, Real GDP expanded quickly, from 2.8% to 6.8% (Q/Q annualized rate). The situation is similar to today, with Real GDP looking like it accelerated in Q3 over Q2, this after the strong recovery in GDP in Q2 compared to Q1.
The top right is the dollar index. The dollar depreciated quickly in 1987, dropping 10% against major trading partners. By contrast, the dollar is acting as a safe-haven currency in today’s environment, with the currency up around 5% against its major trading partners since bottoming last earlier this month.
Earnings per share in 1987
Lastly, the bottom right chart has earnings per share. In 1987, earnings continued to expand, going from $16.1 to $19.6, even though stocks were down 31%. Today, earnings are weakening, with the most recent Q3 estimate at 4% Y/Y growth ($113), down significantly from the $118 in Q2.
The following is a look at how earnings estimates have changed over the past month. As stated, there’s marked drop in earnings.
In all, there are certainly similarities between now and the 1987 equity/economic conditions. In particular, earnings and GDP continued to expand in 1987, even with equities down 31%. Major differences between 1987 and today are quite pronounced. Bond yields jumped in 1987 compared to declining today. The Fed increased rates in 1987, being ahead of the curve, as opposed to the uber-dovish Fed of today. Inflation accelerated in 1987, while inflation seems to be stuck around 2% today. The dollar depreciated substantially in 1987, as opposed to an appreciating dollar today.