After today’s CPI report, it’s pretty much a guarantee that the Fed will hike interest rates again in February. The last time I remember such a rapid and persistent hike in interest rates by the Federal Reserve was in 1987. According to Dr. Martin Feldstein and I quote from an academic journal article published shortly after the crash of 1987, “In January, long-term Treasury bonds had a yield of 7 1/4%, by April it was 8%, by August it was 8 1/4%, and by October it was more than 10%. We all know what happened shortly thereafter. On October 19th, 1987, the market had its steepest one-day slide in history, a stunning 20% plus one-day price crash that left traders shellshock, staring blankly into their quote machines, hiding from their clients.
Of course, it’s different this time. Or is it? At the time, the Federal Reserve was hiking interest rates into a weakening economy just as they are now. According to Feldstein, price-earnings ratios were high by historical standards as the other likely factor precipitating the stock market crash forever known as Black Monday. The similarity to nowadays is striking. As the saying goes, history doesn’t repeat itself; it rhymes.
Of course, we don’t know which Fed rate hike will cause the market to puke as we didn’t know then. The stock market continued to rise in the Summer of 1987, but by the time Fall arrived, huge day-to-day swings in the market were commonplace. Like a rubber band pulled too far, the market snapped. It had enough of the Fed’s interest rates hikes.
One thing I would love to know is what were insiders doing back then. I don’t have access to records of insider activity going back that far I’m not even sure if they exist but my guess is that insiders were unloading stocks much as they are today. What will the straw be that breaks the camel back? That I can pretty much assure you, it will be the same, Fed hiking rates into a weakening economy. When will that happen? An educated guess, October 2023, the 36th year anniversary of Black Monday but only Chatbot GPT knows these things for sure. In the meantime, everyone will continue to skate close to the edge lest they be left behind in the performance rankings game.