Today's stock market looks a lot like 1987's, but that doesn't mean an October crash is imminent

• Today's stock market looks a lot like 1987's, but that doesn't mean an October crash is going to happen.
• Ned Davis Research highlighted the key similarities and differences between now and 36 years ago.
• "While there are several high-level similarities, not enough line up to conclude that a crash-like event is likely."

The similarities between today's stock market and the stock market of 1987 are striking, but that doesn't mean an October crash is going to happen, according to Ned Davis Research.

A third-quarter correction and weakening market breadth are just a few things in common between the S&P 500 today and 36 years ago. 

"The cap-weighted averages have posted strong gains year-to-date, but underlying market breadth has been weak. Inflation fears have pushed interest rates higher, prompting concerns over more rate hikes. Rate-sensitive sectors have underperformed. More recently, the dollar has strengthened, potentially hindering an earnings recovery. Heading into October, the S&P 500 pulled back nearly 8% from its summer high," Ned Davis Research said.

"The above paragraph summarizes 2023. It also describes 1987." 

These similarities could be viewed by investors as grim given that "Black Monday" occurred on October 19, 1987, when the Dow Jones Industrial Average crashed 22.6% in a single day. 

But Ned Davis Research isn't expecting any "waterfall"-type decline this time around, because for as many similarities there are between today's stock market and the 1987 stock market, there are also plenty of differences.

For one, circuit breakers were installed after the October 1987 crash, making a 20% decline "almost impossible," the note said. Circuit breakers halt trading when the S&P 500 drops 7%, 13%, and 20%.

And while the stock market has been moving in the same direction today as it did in 1987, the magnitude of its peak gain this year is off by a magnitude of nearly 20 percentage points.

The differences between today and 1987 also spill over into the broader economy.

"Of all the indicator types, perhaps the biggest differences between 1987 and 2023 are in the macroeconomic data. The economy and inflation accelerated throughout 1987. While economic data has exceeded expectations in 2023, the acceleration in activity has been much less," NDR said. 

Other macroeconomic differences include yield curve, US dollar, and job growth trends, according to the note.

All this is to say that history doesn't repeat, it rhymes. And while there are plenty of commonalities between today and 1987, that doesn't mean a 1987-like crash in the stock market is imminent.

"While there are several high-level similarities, not enough line up to conclude that a crash-like event is likely," NDR concluded.