There's nothing like a sharp sell off in the equity market during the month of October to bring out the worst of investor fears. With last Friday marking the 25th anniversary of the 1987 Crash, those fears are even more apparent. Making matters worse is the fact that the pattern of 2012 bears more than a passing similarity to 1987.
As shown in the charts below, in both years, the S&P 500 started off strong, saw a first half peak in the Spring, and then sold off. In both years, the market regainged its footing around Memorial Day weekend, kicking off a Summer rally. In 1987, the S&P 500 peaked in late August and had two successive failed rallies where each subsequent sell off made a lower low. Likewise, this year the S&P 500 peaked in mid September and has since had two successive failed rallies where the index has made lower lows.
While the patterns between 1987 and 2012 are similar, there are two key differences. First, the S&P 500 was up considerably more at its peak in 1987 (+39%) than it was at the 9/14 peak this year (+16.6%). Secondly, in terms of valuation, the S&P 500's P/E ratio is considerably lower now than it was in 1987. In 1987, the S&P 500's P/E ratio at the low after the crash (14.37) was still higher than it is now (14.28).
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