Dow Jones sees its best month since 1987, what next?

The Dow Jones Industrial Average has just seen its biggest monthly percentage gain since 1987, what next?

Article updated: 2 December 2020 2:00pm Author: Michael Baxter

I was first alerted to the startling news that the Dow Jones has just completed its best month since 1987 by the excellent Jeroen Blokland. You can see his tweet. I also subscribe to his newsletter, something I would recommend investors do.

I found his revelation quite surprising. After-all, 1987 is famous as the year of a stock market crash.

Being a bit anal about these things, I thought I would check it out.

Sure enough, during one month in 1987, the Dow Jones Industrial Average surged by over 13 per cent.

This year has been a strange year indeed — well, I guess we all know that? 

2020 has seen the Dow Jones rise by around 13 per cent in one month, twice. It has also fallen by more than 10 per cent twice.

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1987

On Monday, October 19, 1987, in the UK, we were in shock. High winds had struck Britain. We used to call it the hurricane of 1987 — although technically it was not a hurricane.  If memory serves, the storm of that year was worse in the south. I lived on the South Coast with my parents at the time. The house next door but one from ours saw a massive tree fall on its roof. Everywhere you looked, fallen trees had smashed cars. All the cars that I saw had been parked – thankfully. I lived in Brighton and was due to take a flight from Gatwick that day, and it was impossible to get there.

And so it was that we wandered around on that morning in a kind of hushed silence. Few of us had seen anything like it. 

Later that day, and in the US, the stock market crashed. I believe the timing was a coincidence, but some fund managers said that the sense of unease caused by the ‘hurricane’ had caused them to react very slowly to the stock market chaos.

The US stock market fell by more than twenty per cent in one day. The FTSE100 saw a similarly dreadful day.

Theories abound as to why the crash occurred. In the UK, just beforehand, advertising agency Saatchi and Saatchi had tried to buy Midland Bank. Some suggested that this failed attempt illustrated the madness of those times.

But until I read Jeroen Blokland’s blog, I hadn’t realised that 1987 had also seen such a spectacularly successful month. It was in February that year, more than six months before the crash, that the Dow Jones had risen so rapidly.

Is there a parallel with 1987?

It is tempting to conclude that since the 1987 surge was eventually followed by one of the biggest daily crashes in history, we will see something similar in a few months.

But I am not so sure.

The stock market turbulence of this year was down to very good reasons. And we all know what those reasons are.

I thought the markets would fall further before recovering.  

Rational

There is a good reason for the remarkable resilience of the US stock market this year. And this good reason illustrates why the FTSE 100 has not performed so well. 

The reason is technology.

As a result of Covid, a development that was going to happen anyway, accelerated. That development was the business adoption of digital. Covid saw an acceleration towards digital.

Since digital technology companies are an important part of US stock markets, they have performed well.

Since digital technology companies are not an important part of UK stock markets, they have not performed well.

Vaccine

And when we look at the vaccine, and the astonishing speed with which it was developed, we can cite that same word: technology. It was thanks to technology that the Covid genome was sequenced so fast. Thanks to computing power, vaccines building upon the data yielded by the sequencing of the Covid genome, could be developed super-fast.

And it is because of technology that I am quite optimistic about the economy over the next few years. 

I still think it will be a while before economic output returns to the pre-Covid level. But because of the way the virus has accelerated the adoption of digital technology, I do expect that within two or three years, output will be higher than would have been the case had there been no virus.

Those who think that the surge in public debt caused by the virus will cause an economic slowdown, are, in my opinion, wrong. If anything, it will be the opposite.  The surge in public spending — which thanks to near-zero interest rates is eminently affordable — will boost the economy, just at the moment that radical new technologies make high productivity growth possible.

Will it be like 1987

The stock market boom of 1987 was followed by a crash. The stock market crash of 2020 was followed by a boom. I think that from an investor’s point of view, that is the right way around. 


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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