Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.

EQ: The big news this week is that the Dow broke 23,000. We’ve discussed these major psychological thresholds before, but does this set up the market well for the coming cyclical six?

Stovall: Yes, it does. Actually, going back to World War II, whenever the May through October period was up by 5% or more, that has served as a running start to the coming six-month period, which I call the Cyclical Six. Specifically, instead of the market gaining the usual near-7% in the November through April period, it rose by more than 8% on average following these strong May through October periods. In addition, even the batting average improved from being up 76% of the time to the market rising about 82% of the time.

That obviously is not a guarantee, but it implies that it serves more as a running start rather than the prospect of stealing from the coming six-month period.

EQ: Interestingly, this coincides with Thursday marking the 30th anniversary of Black Monday in which the stock market plunged over 20% on Oct. 19, 1987. Speaking of psychological phenomenons in the market, in this week’s Sector Watch, you discussed that some investors may be fearing a repeat of the crash. Aside from the date, what are some similarities that might lead someone to think that would be a possibility?

Stovall: Well, I think it’s simply because the market has so done well, and we’ve gone 18 months without a decline of 5% or more. Normally, we have at least a 5% decline every year. So, we are certainly overdue by historical measures for a meaningful decline. Also, if you were to map out the price change—meaning the actual index value of the S&P 500 for calendar year 2017 and overlay that on top of the calendar year 1987—you would think that there was an eerie repeat of that upward trend, which could end up being punctuated by a tremendous decline.

However, the problem with doing that is that you’re dealing with totally different scales. Back then, the S&P 500 was trading at about 320, and today, it’s trading at about 2,550. So, if you put it on a rolling year-to-date percent change perspective, then actually, what we’ve been experiencing so far this year is very much muted when compared with the S&P 500’s percent change in 1987. So, looking at the percent change would calm investors’ nerves quite a bit.

EQ: In the unlikely event that we were to experience another worst single-day drop in history, what advice would you give to investors?

Stovall: I think investors should just make sure that they understand what happened back then and how different things were from what is going on today. The Fed had engaged in a rate tightening program back then, which is what they’re doing now, and that’s one reason why investors are worried. Well, back then, the Fed funds rate was at 7.25%. Today, it’s at less than 1.25%. So, we have to realize that the cost of money was quite a bit higher back then. Also, back then the yield on the 10-year note was at 9.5%, but today, that yield is below 2.5%.

So again, I think investors have to realize that we’re in a very low inflation environment. In fact, inflation today is half of where it was back in 1987, and as a result, being in such a low inflationary environment, we can certainly support the P/E ratio that we have currently, which is less than 24 times trailing 12-month GAAP earnings, as compared with a P/E ratio of about 20 times back in 1987. A lot of this data is very easily found online, so my suggestion is that before anybody really starts to worry about comparisons between today and any other period in time, match them up side by side and see how close or far they actually are.

EQ: When you look at where the index level was in 1987 and where it is today, it’s still up very significantly despite the Black Monday crash. Is this a reason why long-term investors should not bail if the worst were to happen?

Stovall: Yes, and what I also did is look at what was happening in 1987. Was there any kind of a warning signal? The answer was yes, because the market peaked on Aug. 25 of that year, and we were down 16% on the Friday before the Monday crash. So, we were already well into a pretty deep correction and it’s not as if investors were taken by surprise. It’s not like what we’re seeing today with the S&P 500, the Dow and the Nasdaq hitting all-time highs. Back then, we had two months to be worrying about the eroding of stock performances.

So, I would basically say to pay attention to the surrounding performances, but also when we do have a very sharp decline in the overall market, remember that what comes down very quickly usually tends to recover very quickly as well. While it took us fewer calendar days to eclipse that 20% threshold back in 1987, it also took us 154 days less to get back to break-even than we normally needed from all bear markets since WWII.