Black Monday fears persist, but market indicators point elsewhere

This date marks the anniversary of the 1987 stock market crash. Yet for all the traders who spent the weekend rattled by talk of a repeat, today's conditions are entirely different.

Index futures late yesterday pointed to a slightly firmer start for Dow contracts, with prices up 0.1% — a stark contrast to the Dow's 22.6% plunge on October 19, 1987.

With futures offering scant pricing evidence of a looming crash, the anxiety has instead centered on AI stocks. A widely shared essay positing a “stealth” bear market lurking inside otherwise strong benchmarks such as the S&P 500 has gained particular attention.

Market commentators posted calls for a Black Monday, accumulating millions of views in total.

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Markets have officially entered panic mode.

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Nor is today's market heading into the session already in freefall. The Dow topped out at 2,722 in August 1987 and had fallen about 17.5% by the Friday close before the crash.

The Dow today is only 4.5% below its all-time high, while the S&P 500 is within 2% of a record high.

The pace of the slide preceding today is another problem for doomsayers expecting catastrophe.

The Dow had already lost more than 10% in the three sessions before Black Monday 1987. Today's S&P 500, in contrast, had shown no crash-like behavior before two trading days ago.

Today lacks the pre-crash conditions, portfolio insurance and other 1987-era features

Second, today's market is missing the two ingredients that enabled the 1987 crash: portfolio-insurance selling and trading without circuit breakers.

Portfolio insurance, a trendy 1980s technique for embedding pre-set stop-losses in investment portfolios, sold futures automatically as the crash of 1987 played out.

President Ronald Reagan appointed the Brady Commission to investigate Black Monday, and the panel's report blamed portfolio insurance as one of the principal sellers that day.

Modern circuit breakers were also absent from exchanges in 1987. A 7% drop in the S&P 500 now triggers a 15-minute pause in trading, something Black Monday-era markets lacked.

A 20% decline would close US exchanges for the rest of the day.

So a 22.6% one-day crash like Black Monday is impossible for US stocks today, because an S&P 500 decline greater than 20% cannot clear on US exchanges in a single session.

The S&P 500, moreover, is not particularly expensive by 1987 standards.

The multiple on trailing earnings is an estimated 26, only a bit above the 23.3 multiple logged at the 1987 peak.

Finally, S&P 500 members have been growing earnings at an average annual pace of 29% in their most recent quarter, and FactSet estimates the index is reporting a third consecutive quarter above 25%.

That is not what happened before Black Monday in 1987, when companies posted essentially flat earnings, ranging from −1% to +4% year-over-year across the three quarterly reports ahead of the crash.