Market Correction: Is 1987 A Good Guide?

The macro (rising rates and inflation) and market (rising equity prices) backdrop has people compare the current situation with 1987… right before the equity market plummeted. Are we in the same situation and does it mean the worst has yet to happen. Maybe not.

True, 1987 occurred after a period of rising rates, higher inflation, lower USD and booming equity markets. Yet the comparison stops there, according to Morgan Stanley’s strategists.

The first major difference is what drives equity market outperformance: this time around it’s EPS growing not P/E multiple rising (which was the case in 1987).

Second, most of the severe market corrections of the past have occurred during a recession, situation which is not happening yet. This also means that if the current market correction might not be completely over, we haven’t reached a situation where investors have capitulated (meaning it’s not time to buy on the dip).

Source: Morgan Stanley

Third, the relative valuation of stocks compared to bonds is considered much more attractive now than it was in 1987.

And for instance, in Europe, valuation multiples have contracted back to where they were 3-4 years ago, according to MS.

If history is any guide…

Yet since we never know what might happen tomorrow, here is a useful table that encompasses all previous market corrections and how different sectors behave in the past 30 years.

Of course history never repeats itself… But it tends to rhyme.

Source: Morgan Stanley



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