'Just like in 1987.' Here's what could deliver a 'devastating blow' to stocks, says SocGen strategist Albert Edwards.

By Barbara Kollmeyer

Those surging bond yields -- like being trapped in a car that you know is about to crash, and helpless to stop it.

That's the view of Société Générale's sharp-tongued strategist Albert Edwards, who warns of a 1987-style event for stock markets if the bond market does not cool off, in a new note to clients.

The S&P 500 SPX experienced its worst month in a year during September, but is still up 11% for the year, after a 19% plunge in 2022. But bond chaos has seen the yield on the 30-year Treasury BX:TMUBMUSD30Y reach its highest in more than a decade. Fresh pressure was hitting bond prices on Tuesday.

Read: How Treasury market upheaval is rippling through global markets in 4 charts

Here's Edwards: "The equity market's current resilience in the face of rising bond yields reminds me very much of events in 1987, when equity investors' bullishness was eventually squashed. And in a further parallel, currency turbulence in 1987 played a key role in exacerbating recession worries for an equity market priced for the start of a new economic cycle."

And what could break the bough for stocks? "Just like in 1987, any hint of recession now would surely be a devastating blow to equities," said the strategist.

Here's a chart that offers a glimpse of what happened that year. Festering worries about overvalued stocks due to correct, rising interest rates and higher fiscal deficits came to a head on Black Monday of Oct. 19, 1987 when a worldwide stock crash wiped 30% off the value of the S&P 500. Some estimated global losses from that day at over $1.7 trillion.

His alarm follows a J.P. Morgan Asset Management strategist who warned Monday that yield rampage could end up causing a "financial accident."

"Never in my career have I witnessed such uncertainty about where we are in the economic cycle. Is that long promised recession still lurking around the corner or are we at the start of a new economic cycle? Many investors are apparently increasingly convinced it's the latter," said Edwards.

His own view? A recession continues to lurk, but like many others, he's been holding that view awhile and proven wrong so far. He does though, one chart, of sharply falling trucking jobs, that "typically signals a recession dead ahead."

Other recessionary troubles he is spotting? Surging bankruptcies among smaller companies and money supply signals, such as contracting M2, which measures U.S. cash in circulation, checking deposits, savings deposits under $100,000 and money-market mutual funds. The M4 money supply, which measures notes and coins in circulation, along with bank accounts, also is contracting.

"The last few decades have seen economists (especially at the Fed) increasingly disregard money supply. Monetarists have been marginalized --- if not dismissed as cranks. That is a mistake in my opinion. I wouldn't call myself a monetarist, but when money supply weakness is confirmed in the data, I sit up and take note," he said.

Edwards also circles back to his "maddest chart" that shows plunging corporate net interest payments, "even more of anomaly compared with recent history." The strategist has previously discussed how corporations have borrowed for the longer-term at low rates from 2020 and 2021 and are lending it back to the U.S. government at higher short-term rates. Read more about rising corporate interest payments here.

-Barbara Kollmeyer

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10-03-23 1029ET

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