Stock Market Crash Similar to 1987 is Coming
Fears over US monetary tightening, rate hikes, and recession triggered the 1987 stock market crash, and there are parallels with today’s market environment, said Société Générale’s Albert Edwards. In his latest note, the ultra-bearish strategist said the evolution of bonds yields and equity markets this year looks similar to what happened before the market collapse of 1987.
On 19 October that year, a day also referred to as ‘Black Monday‘, the US market saw its largest one-day percentage drop in history when it plunged 22.6%.
“In the wake of a run-up in US bond yields that year, equities were richly priced and so very vulnerable to recession fears, however unfounded,” he wrote. “That could not possible happen again, or could it?”
Edwards warned investors global markets are “far, far more vulnerable to a resumption of the 2008 financial crisis than the consensus would have us believe”.
This renewed global recession is likely to be triggered by a collapse in emerging market currencies, with deflation spreading to Western countries and forcing China to devalue as it loses competitiveness. He likened this scenario to a domino effect, where “the most wobbly domino falls and topples the whole precarious, rotten, risk-loving edifice our policymakers have built.
“China has gone off the radar in the last month, but it is set to return centrer stage,” Edwards warned. “That will be the biggest domino to fall.”
The strategist predicted the Federal Reserve will ramp up quantitative easing “exponentially” to counter the crisis, which will lead to inflation which is unlikely to be sustainable. He reiterated his forecast the S&P 500 could drop as low as 450 from its current highs of 1,638, while yields on 10-year US treasuries could fall below 1% and gold could soar as high as $10,000 per ounce.
Previously, Edwards has predicted a hard landing in China and last summer he forecast a fall in the S&P 500 to 666.