Should You Be Worried About a Strong Market?

January 18, 2019  |  Michael Reilly

This week has seen quite a few ups and downs, both for the market and investor’s emotions.

As usual, the mainstream financial news outlets are full of the same old “noise” that makes it difficult to discern what’s really going on.

At the time of this writing, MarketWatch’s most viewed article is titled The stock market hasn’t started a year this strongly since 1987 – uh-oh!

Interestingly enough, this article fails to draw very many parallels between the current market and the one that precipitated the crash of 1987. There’s some discussion about how gains in small caps are driving this year’s strength and how those aren’t likely to last…and that’s about it. The article concludes with a statement about how small cap company stocks were up last year because those companies were seen as more resistant to fallout from trade disputes between the US and China, and how that rally faded as the disputes continued.

This is a perfect example of how big name financial publications like to seize on any opportunity to generate clicks to drive up their ad revenue, and how (when you dig a little deeper) those fear mongering headlines are actually pretty weak.

The basic gist of this whole Uh oh! article basically boils down to this. The last time we saw this strong of a start, this early in the year, the market crashed.

The thing is…it wasn’t the strong start that caused the market to crash back in ’87, there were a host of conditions that lead to Black Monday.

If you look at history, there were several big, unforeseeable events that laid the groundwork for the crash back in ’87. Two big oil tankers, one US owned, the other US flagged, were sunk by Iran back-to-back just four days before the crash occurred. The next day all the markets in London were unexpectedly closed due to the Great Storm of 1987. To top it all off, on the morning of Black Monday the US retaliated against Iran by shelling one of their oil platforms…

When you look at these kind of conditions, and compare them to today, it’s almost laughable to assume that we’re heading towards a similar situation. We’re not engaged in any sort of ship-to-ship missile warfare like we were back in the 80s, US military involvement these days is largely restricted to clashes with terror cells, and it’s extremely rare that these jeopardize our oil supplies in a way that would have a significant effect on the market.

It’s also worth noting that the crash back in 1987 was likely furthered by computerized trading that triggered in a sort of cascade-style effect. Lows in the market tripped automated protocols that started selling off stocks, which lead to further drops and more selling.

The thing is, this occurred in such a dramatic fashion because it was the first time a big drop occurred after computerized trading became widespread. Immediately after Black Monday happened, new regulations went into effect and trade-clearing protocols were completely re-designed to prevent the kind of automated selling massacre we saw back then.

This is a good fact to keep in mind any time someone starts making comparisons to the crash of 1987.

What we do know, right now, is that the US economy is still in a strong place. Unemployment is historically low, and optimism surrounding trade talks with China has even lead to a 350 point jump in the Dow.

Now, this isn’t necessarily saying that you should be completely optimistic at a time like this. There’s a lot of bearish sentiment creeping out of the woodwork at the moment due to signs such as low trading volume and bearish signals in the S&P, but the fact of the matter is that it’s just too soon to tell.

We’ve already begun to rally from the oversold conditions we saw at Christmas, and it will be important to keep your eyes on market conditions over the next three to five months to see if more signs of a new bear market poke their heads up. It’s certainly not out of the question, but it’s still early for any kind of strong prediction.

What you shouldn’t be worried about is that this year’s strong start is any kind of indicator of a future “apocalyptic event” akin to what we saw in 1987…unless you’re actually in the mood for an unnecessary, painful, stress-induced ulcer.

As always, invest wisely.

Michael Reilly

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