NEW YORK (Reuters) – Investors ought to brace for a possible replay of the 1987 stock market crash later this yr, given this month’s stoop got here towards the backdrop of Federal Reserve rate of interest hikes and rising inflation, Scott Minerd, Global Chief Investment Officer at Guggenheim Partners, stated on Tuesday.
“Eventually the Fed will acknowledge that three rate hikes will not be enough, but it is going to raise rates four times in 2018, and market speculation will increase that there may be a need for five or six rate hikes. That will be the straw that breaks the camel’s back,” Minerd stated in a notice to shoppers.
On Monday Oct. 19, 1987, following giant declines on Asian and European markets the earlier week, the Dow Jones Industrial .DJI Average plunged 508 factors, or 22.6 %, for the biggest-ever single day decline in proportion phrases by the blue-chip benchmark.
Despite wholesome U.S. company earnings and financial progress, inflation fears and rising bond yields, have already resulted in a 1,175 level fall within the Dow Jones Industrial Average on Feb. 5, the most important ever in level phrases, although in proportion phrases it was solely four.6 %.
The U.S. shopper worth index for January revealed final week rose greater than anticipated, with headline CPI inflation as much as 2.1 %, main buyers to anticipate the Fed to boost rates of interest at the least 3 times this yr.
U.S. Treasury bond yields have been rising since final autumn, and are beginning to increase the price of borrowing for shoppers and corporations, with the benchmark 10-year word reaching 2.94 % final week, up from 2.08 % in July final yr. Home mortgage charges rose to four.57 % final week, the very best since 2014. And the U.S. greenback .DXY has fallen 15 % prior to now 13 months.
“Today, investors have the same sorts of concerns they had in 1987,” Minerd stated. By August 1987, equities have been at document highs, the Fed was elevating charges, the U.S. greenback was underneath strain and there have been growing considerations over inflation, Minerd famous.
“The concern was the Fed was behind the curve as it accelerated rate increases,” he stated. “By October, things were becoming unhinged. Bond yields had risen in the face of an extended bull market in stocks. The market reached a tipping point and began its infamous slide.”
As the Fed continues to boost charges this yr, valuations of danger belongings based mostly upon religion in ultra-low charges and central financial institution liquidity will come into query, Minerd stated. “Prepare for danger ahead, but also opportunity,” he added.
“Anytime we see strength in economic data, we are going to see upward pressure on rates,” Minerd stated. “Upward pressure on rates is going to result in concern over the value of risk assets, and we are going to have a sell-off in equity markets, or the junk bond market, or both. Credit spreads will widen.”
The actuality of the state of affairs is that the quantity of fiscal stimulus within the pipeline, the U.S. financial system quick approaching full employment, the financial bounceback in Europe, and the pickup in momentum in Japan and in China “are all real,” he stated.
Reporting By Jennifer Ablan; modifying by Clive McKeef