Is History Repeating Itself? A Warning of a Possible Stock Market Crash

As a global strategist at Société Générale, I can't help but notice the striking similarities between the current stock market situation and the events leading up to the infamous 1987 crash. The stock market's resilience in the face of rising bond yields echoes the bullishness of investors before the crash. With increasing uncertainty about the U.S. economy and fiscal dysentery in Washington, the 10-year Treasury yield has surged over 4.7%. Are we on the brink of another devastating blow to equities?

The Resilience of the Equity Market

Despite rising bond yields, the stock market remains resilient. Is history repeating itself?

Even as bond yields continue to rise, the stock market shows remarkable resilience. This situation reminds me of the events leading up to the 1987 crash, where investors' bullishness was eventually crushed. The question now is whether history is repeating itself.

The equity market's current strength in the face of higher interest rates raises concerns. As U.S. bond yields surge higher, it feels like we are in a car about to crash but are powerless to stop it. The lure of safe returns from Treasury yields is pulling investors away from the riskier stock market, echoing the events of 1987.

Uncertainty Surrounding the U.S. Economy

Increasing uncertainty about the future of the U.S. economy adds to the potential risks. Is a recession imminent?

Never before in my career have I witnessed such uncertainty about where we are in the economic cycle. The future of the U.S. economy is shrouded in doubt, with rising interest rates and fiscal dysentery in Washington. The ongoing political gridlock and record budget deficits have nearly led to multiple government shutdowns.

Investors are increasingly convinced that we are at the start of a new economic cycle, but my own view is that a recession still lurks. The recent drop in consumer confidence, the ongoing surge in oil prices, and the contracting housing market all point towards potential economic downturn.

The Warning Signs: Recession and Market Indicators

Several warning signs indicate that a recession may be imminent. Are equities priced for a soft landing scenario?

There is plenty of evidence to suggest that a recession is on the horizon. The recent drop in retail sales, which typically signals a recession, is a cause for concern. Additionally, the ongoing surge in oil prices and the contraction of the housing market further add to the warning signs.

Equities are currently priced for a soft landing scenario, where the economy recovers without a significant increase in unemployment. However, any hint of a recession would be a devastating blow to equities. The stock market is at a critical juncture, and investors should be prepared for potential downturns.

GDP Growth and Economic Activity

Revisions to the GDP report and real GDI growth suggest a slowdown in economic activity. Is the 'soft landing' over?

Recent revisions to the second-quarter GDP report have shown that gross domestic income (GDI) growth has not been as robust as previously imagined. Real GDI growth, when accounting for inflation, fell to just 0.2% year over year in the second quarter. This is the lowest trend ever recorded without a recession taking hold.

Economists warn that the 'soft landing' may be over. The declining GDP growth and real GDI growth indicate a potential slowdown in economic activity. These factors, combined with rising interest rates and other warning signs, contribute to the growing concerns about the future of the economy.

Conclusion

As a global strategist, I cannot ignore the striking similarities between the current stock market situation and the events leading up to the 1987 crash. The equity market's resilience in the face of rising bond yields is reminiscent of the bullishness before the crash. With increasing uncertainty about the U.S. economy and potential warning signs, such as a drop in consumer confidence and the contracting housing market, it is crucial for investors to remain cautious.

While history may not repeat itself exactly, it is essential to learn from the past and be prepared for potential downturns. As the Federal Reserve continues its fight against inflation, the stock market's future remains uncertain. All we can do is brace ourselves and hope for the best.

FQA :

Is history repeating itself?

There are similarities between the current stock market situation and the events leading up to the 1987 crash, but it is important to note that history may not repeat itself exactly.

What are the warning signs of a potential recession?

Warning signs of a potential recession include a drop in retail sales, a surge in oil prices, and a contracting housing market.

Should investors be concerned about the stock market's resilience?

Investors should remain cautious and consider the potential risks, such as rising bond yields and uncertainty surrounding the U.S. economy.

What can investors do to prepare for potential downturns?

Investors can diversify their portfolios, stay informed about market trends, and consult with financial advisors to make informed decisions.

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