Sectors: Tracking the Bear's '87 Rampage

A comparative look at the economy and markets of 1987 vs. today, plus a review of sector performances during three crash-related periods

by Sam Stovall

SPECIAL REPORT

The '87 Crash: 20 Years Later

• Lessons from the '87 Crash
• How to Protect Your Portfolio
• Sectors: Tracking the Bear's '87 Rampage
• Sizing Up the Next Crash
• Flashback: How the Bull Crashed Into Reality

S&P 500, Before and After the Crash

How Things Have Changed

S&P Industry Standouts, Before and After the Crash

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During the coming days, several market veterans will relive their experiences of the October, 1987, stock market crash, selectively recalling—and most likely embellishing—the events leading up to the crash, and whether they were the ones who called the top and advised everyone to get out. Let me say up front that I was relatively new to Wall Street at the time; I managed no one's money and had none of my own, so I was swept up by the magnitude of the event with the enthusiasm of an historian who was happy to be alive during "interesting" times.

In this article, I won't revisit catalysts or emotions of the day, but I will take a comparative look at the economy and markets of 1987 and today. I will also review sector performances during the three periods related to the crash: 1) performances in the eight months leading up to the top of the market in August, 1987; 2) the subsequent bear market through December, 1987; and 3) the eventual recovery more than a year-and-a-half later in July, 1989.

Changing Rules of Thumb

Whenever I look at historical levels for equity prices, I always remark, "Were they THAT low?"—this says a lot for being a long-term investor. Back at the end of the third quarter of 1987, the Dow Jones industrial average (DJIA) was 2,596, which makes the magnitude of the Oct. 19 decline of 508 points all the more sobering. With the DJIA at 13,896 as of the end of the third quarter of 2007, a 22.6% decline—what the DJIA experienced on Oct. 19, 1987—equates to a drop of 3,165 Dow points today. Since then, however, the DJIA has posted a compound annual growth rate (CAGR) of 8.7%.

During this same 20-year span, the Standard & Poor's 500-stock index was trading at 322 vs. 1,554 today, and posted an 8.1% CAGR, with similar results for the other major indexes: Russell 2000 (171; 805; 8.1%) and the Nasdaq (444; 2,702; 9.4%). Back in 1987, the S&P 500 was sporting a trailing 12-month GAAP (or "as reported") price-to-earnings ratio of 20.3 times, vs. the 17.9 times multiple we see today.

In addition, the dividend yield for the S&P 500 was 2.69% vs. the 1.77% today. Because of the market's then-low yield, a short-lived rule of thumb became: below 3%, get worried; below 2.7%, get out! That obviously is not a rule that is used much anymore.

Ups and Downs

Other interesting comparative levels include U.S. gross domestic product (GDP): The economy has more than doubled in the past 20 years and posted a compound rate of growth of nearly 4%. Inflation, as measured by the headline consumer price index, has risen 3% per year, but gained less in the past 12 months than it did in 1987. Gold, while being 60% higher today than in 1987, has risen by less than the rate of inflation over the same period. Prices for the benchmark West Texas Intermediate grade of crude oil, however, have skyrocketed from $18.50 per barrel in 1987 to more than $81 per barrel today, posting a 7.7% CAGR—more than inflation and the growth of U.S. GDP, but less than the appreciation of the S&P 500 price or its earnings.

The yield on the 10-year Treasury note today is about half of what it was in 1987, and the Fed funds rate is 250 basis points lower today than 20 years ago. Lastly, in a surprise to almost no one, the value of the U.S. dollar today vs. a trade-weighted basket of foreign currencies is 21% below 1987's level.

Industry Price Performances

Now that we have a better understanding of comparative economic and equity benchmark levels, let's review the price performances for industries in the S&P 500 during three periods in a simple time line to get a better feel for industry leaders and laggards in the eight months leading up to the peak for the S&P 500 in 1987 (specifically analyzing data from December '86 through August '87), followed by the market's decline from its high in August '87 through its bottom in early December '87, and then from the bottom until all that was lost in the bear market was recovered by late July '89.