Worrying Parallels Emerge between 1987’s Stock Market Crash and 2023’s Bond Sell-Off
Even after nearly four decades, the stock market crash of 1987 remains etched in the memory of financial markets. Referred to as Black Monday, it was the worst single-day of trading since the infamous crash of 1929. As the 36th anniversary of this fateful day approaches, financial experts are drawing parallels between that era and the present, raising concerns about a potential repeat of history.
The bond markets are currently experiencing a sell-off, reminiscent of the events leading up to the crash in 1987. Debt levels have soared, and equity markets are stretched to their breaking point. A seemingly invincible bull market appears to be reaching its end, which could result in a destructive force sweeping through the markets.
If a crash of similar magnitude were to occur, it would have catastrophic political and economic consequences. Interest rates would skyrocket, causing mortgage holders and highly indebted companies, particularly in the property sector, to face increased costs. Businesses would fail, and pension funds would suffer.
Moreover, the already high costs of servicing national debts would escalate further, forcing spendthrift politicians to confront the consequences of their extravagant expenditures.
Recent weeks have seen numerous similarities between the financial markets of the late 1980s and the present. However, one crucial difference exists. Policymakers had fiscal room to respond to the crash of Black Monday. Decades of easy money and constant market buffering with quantitative easing have eliminated this flexibility.
It remains to be seen whether a rerun of 1987 is in the cards. However, one thing is certain: if it occurs, the impact will be far more severe this time around.
Investor concerns are primarily driven by a sell-off in the bond market. This market involves companies and governments issuing debt with a guaranteed rate of return. While typically a placid segment of the financial market, recent weeks have seen a wave of selling.
A notable example is Austria, which issued a 100-year bond during the peak of the government debt bull market. With a coupon of just 0.85%, investors would have had to wait a century to recoup their investment, earning less than a 1% return. Astonishingly, the bond was 16 times oversubscribed. However, it has since plummeted in value, with investors receiving only 33 euros for every 100 euros invested.
More detail via The Telegraph here… ( Image via The Telegraph )