Like many investors, my nerves have been on edge lately regarding this shaky stock market we are witnessing. I’ve been reading a bunch of gloomy articles lately, and I see a lot of references to the crash of October 1987, and whether we might be setting up for a repeat of that crash.
I did some digging regarding that time period, and I think a comparison to today is necessary:
October 19th, 1987:
S&P 500 earnings yield: 5.88%
US 30yr yield: 10.25%
US CPI (inflation): 3.5%
S&P 500 dividend yield: 2.72%
S&P 500 earnings yield: 4.76%
US 30 yr yield: 3.30%
US CPI (inflation): 2.5%
S&P 500 dividend yield: 1.98%
What jumps out to me is that US govt bonds were yielding over 10% in 1987, despite inflation only being slightly higher to what we are currently experiencing.
So yes, in October 1987, there was a highly compelling case to abandon the S&P 500 yielding 5.88% in favor of risk-free govt bonds yielding 10.25%. And once the herd decided to do just that all at once, a crash followed.
However, even a “low” 4.76% earnings yield in stocks today is much more compelling than the current 3.30% you will get owning 30 year bonds. Not to mention the variety of ways companies can reward you (buyouts, buybacks, dividends, partnerships, etc) relative to just collecting coupons from govt debt.
In short - I don’t know what the stock market will do going forward, but do believe comparisons to October 1987 aren’t really applicable.