Veteran market analyst Ed Yardeni recently noted that the current global equities selloff bears similarities to the infamous 1987 market crash. Despite investor anxieties back then, the economy managed to avoid a downturn, a scenario that Yardeni believes could potentially repeat itself today.
“This situation is very reminiscent of 1987,” Yardeni remarked during an interview on Bloomberg Television’s *Bloomberg Surveillance*. “We witnessed a crash in the stock market — which essentially occurred in just one day — and the assumption was that we were either in a recession or about to enter one. However, that didn’t happen. The crash had more to do with the internal dynamics of the market rather than the broader economy.”
One of the factors attributed to the current steep decline in equities is the unwinding of bets that leveraged near-zero funding costs in the Japanese yen to invest in various other assets. This strategy, known as the carry trade, was destabilized by the Bank of Japan’s recent interest rate hike and its indication of potential further actions. Traders have also pointed to the unwinding of investments in major U.S. technology companies as contributing to the market selloff.
“I believe there’s a similar situation happening now as in 1987, concerning internal market dynamics,” Yardeni, who leads Yardeni Research, explained. “Much of this selloff is related to the unwinding of the carry trade.”
Back in 1987, then-Federal Reserve Chair Alan Greenspan responded by lowering interest rates and injecting liquidity into the financial system. Yardeni anticipates that today’s monetary policymakers will likely respond to the current market conditions, although he did not forecast an emergency rate cut.
“This is turning into a global financial panic,” Yardeni said, expressing his belief that central banks would act in response. His comments came before U.S. stocks recouped some of their losses by midday Monday on Wall Street.
By noon in New York, the S&P 500 index had dropped approximately 2.3%, having earlier declined by as much as 4.3%. Meanwhile, Japan’s Topix Index experienced a steep decline of more than 12%. U.S. Treasury yields surged before retracing some of the move.
Yardeni suggested that policymakers’ initial response might be to “ease concerns about the U.S. economy” and to counter the possibility of the Federal Reserve initiating its easing cycle with a substantial 50 basis-point rate cut. He added, “But another couple of days like Friday and this morning’s futures selloff, and I think the central bank will switch to providing liquidity — and that could very well mean a 50 basis-point cut.”
The risk, according to Yardeni, is that the market’s steep decline could become self-perpetuating and evolve into a credit crisis. “It’s conceivable that this carry trade unwind could trigger a financial crisis that, in turn, leads to a recession,” Yardeni warned, although he emphasized that this is not his primary expectation.
Despite recent volatility, Yardeni pointed out that the labor market remains robust. Even after a weaker-than-expected U.S. jobs report last Friday, which showed a significant slowdown in payroll growth and an unexpected rise in the unemployment rate, Yardeni remains cautiously optimistic. The report fueled concerns that the Federal Reserve might be lagging in its efforts to reduce interest rates from their highest levels in over two decades.
“The U.S. economy is still growing,” Yardeni observed. “I think the service sector is performing well. Overall, I believe this will be more of a technical market aberration rather than a development that leads to a recession.”
Yardeni, who is well-known for coining the term “bond vigilantes” in the 1980s — referring to investors who influence policymakers by driving up interest rates due to concerns about fiscal policies — continues to monitor the situation closely.
In summarizing his outlook, Yardeni maintained a relatively positive stance. He argued that while the current market selloff may be alarming, it is not necessarily indicative of an impending economic downturn. Instead, he suggests that the recent market turmoil could be attributed more to technical factors than to underlying economic weaknesses.
“The market has a tendency to react strongly to specific catalysts, but that doesn’t always mean there’s a fundamental problem with the economy,” Yardeni elaborated. “We’ve seen similar scenarios before where markets corrected sharply only to stabilize once the initial panic subsided.”
Yardeni’s analysis reflects a broader debate among economists and investors about the potential impact of recent market trends on the global economy. While some fear that the current selloff could foreshadow a more significant economic downturn, others, like Yardeni, believe that the market’s internal mechanics are primarily to blame and that the broader economy remains on solid footing.
As central banks around the world monitor the situation, the next steps in monetary policy will likely be critical in determining whether the market’s recent volatility is a temporary blip or the beginning of a more sustained downturn. Yardeni’s insights, drawing on historical parallels and his understanding of market dynamics, suggest that while caution is warranted, there is also reason to believe that the worst-case scenarios may not materialize.
Yardeni’s perspective offers a nuanced view of the current market selloff. While acknowledging the potential risks, he remains hopeful that the economy will weather this storm, much like it did in 1987. His emphasis on the importance of central bank intervention and his belief in the resilience of the U.S. economy provide a counterbalance to the more pessimistic outlooks that have emerged in response to recent market developments. As always, the future remains uncertain, but Yardeni’s analysis provides valuable context for understanding the forces at play in today’s financial markets.