The economist who predicted the 1987 “Black Monday” crash now has a new forecast.
October 19, 1987 was a day of hell for stock traders. Known as “Black Monday,” the stock market crash sent markets around the world tumbling, with US markets falling more than 20% during the trading session that day.
Mark Skousen, editor-in-chief of Forecasts & Strategies, predicted a major market correction would occur in 1987, and months before October, advised clients to sell all their stocks and keep cash.
“There was a huge bubble. I was a bit against the grain because everyone was in favor of Reaganomie (the economic policy led by Ronald Reagan) I think the market had just gone up too far, too fast, there was a book coming out at the days that were called “How to Make $ 100,000 a Year as a Stock Broker”, and you couldn’t sit down to dinner without hearing someone recommend a mutual fund that could only go up and up and down. not go down. There was also computer trading, something that had just started to develop, computer trading, and so when everyone gave signals to sell and the markets fell, it was just a panic type situation, Mr Skousen recalled.
In comparison, today’s markets are more resilient to shocks, noted Mr. Skousen, due to two factors: the introduction of circuit breakers (breakers in the event of an excessive fall, the markets are automatically suspended) and a greater government intervention.
“There are two factors that work against it (another 1987-type crash), and yes computer trading is even worse now, it’s like over 90% of all trades are computer generated. But they can also be generated by government intervention and when the government spends a billion dollars to buy financial assets like in March of this year, it is enough to turn the situation around, and that is why there is has a V-shaped rally in the stock market, ”he said.
“You also have the circuit breakers that tend to calm investors down and keep them from overreacting and getting too emotional. The key factor in 1987 was a psychological collapse in addition to the computer-generated sale. “
Mr. Skousen remains optimistic, but cautious, as the election approaches, noting that a Biden victory could hurt financial markets.
“With a Biden administration, which would be the presumed winner according to polls and electoral bets, Biden and the Democrats expected to take control of all three branches of government, this could be a significant selling opportunity. Biden is no friend of investors. He wants to remove the long-term capital gains tax break, which means investors, whether short or long term, will have to pay 40% of their profits to the government, “he said. “If you have huge profits, you’re going to sell now and pay maybe 23%, not 40%.”
Clearly, this economist thinks that the technical “securities” making it possible to curb market panics as well as public interventions will prevent a crash of the 1987 type, which is perfectly valid reasoning.
But the absence of a -20% crash in one day does not mean that there will not be a -10% crash per day as we saw during the subprime mortgage crisis and after the fall of Lehmann Brothers bank.
Nevertheless, and even if we should have a second phase of market correction, the injections of central banks obviously thwart these forecasts and these economic logics by completely distorting market mechanisms.