Guggenheim's Minerd concerns of a possible replay of 1987 stock market crash

Guggenheim's Minerd concerns of a possible replay of 1987 stock market crash

February 21, 2018

How many of you remember Black Monday? For those of you too young to remember in finance, Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time.

The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin.The DowJones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning of a global stock market decline, making Black Monday one of the most notorious days in financial history.

On Tuesday Scott Minerd Global Chief Investment Officer at Guggenheim Partners told Reuters that "investors should brace for a possible replay of the 1987 stock market crash later this year, given this month’s slump came against the backdrop of Federal Reserve interest rate hikes and rising inflation."

His concern is that the Fed will eventually acknowledge that three rate hikes will not be enough and will be forced to raise rates four times in 2018. The problem is that market speculation will increase and there may be a need for five or six rate hikes. If that were to happen then that would be "the straw that breaks the camel's back".

Though the U.S. economy is healthy with increasing corporate earnings and economic growth, inflation fears and rising bond yields, have already resulted in a 1,175 point fall in the Dow Jones Industrial Average on Feb. 5, the biggest ever in point terms, though in percentage terms it was only 4.6 percent.

“Today, investors have the same sorts of concerns they had in 1987,” Minerd said. By August 1987, equities were at record highs, the Fed was raising rates, the U.S. dollar was under pressure and there were increasing concerns over inflation, Minerd noted.

“Anytime we see strength in economic data, we are going to see upward pressure on rates,” Minerd said. “Upward pressure on rates is going to result in concern over the value of risk assets, and we are going to have a sell-off in equity markets, or the junk bond market, or both. Credit spreads will widen.”

It would be wise to consider reducing some your risk, locking in some of your gains at this time, and move some of your assets that are marked for retirement or for beneficiaries into vehicles that have safety of principal. You can do this and still participate in a market rise without the risk.