The crash of '97: the story so far

Equity markets in London and New York both rose by about 30% over thed so hard as they did ten years ago. But while they look highly-priced on earnings grounds, they are being supported by low interest rates. course of 1997 before peaking out and sliding. Ten years ago, equities on both sides of the the Atlantic soared more than 40% before running out of steam. But while typhoons have raged through some Asian markets, the FTSE-100 and the Dow Jones index have seen relatively small dips and, after a small bounce, are now 20% higher than in January.

Ironically, however, both Wall Street and London entered 1997 on substantially higher price/earnings ratios than at the start of 1987.

Supported by reasonable earnings growth – and less dramatic stockmarket rises – p/e’s have not risen so steeply throughout the year. On the face of it, it is worrying that equities are still more highly rated than they were at their 1987 peak – and are far more highly priced than after the crash of ’87.

Equities are being supported, however, by historically low bond yields.

These yield gap graphs – which show the difference between UK gilt yields (and the US long bond yield) and the yield on UK (and US) equities – show that equities are still reasonably priced. But interest rates today are at least two percentage points lower than ten years ago. Equities may be vulnerable if such low rates prove to be unsustainable.