Hong Kong Index Looks a Lot Like the Dow Before Black Monday

March 26, 2018, 12:00 AM EDT
Bloomberg

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History redux? The surging tension over trade between the U.S. and China has prompted comparisons to American combativeness toward Japan that preceded the 1987 equity meltdown -- at least, in the mind of veteran market analyst Hao Hong.

While Hong, head of research with Bocom International Holdings Co., acknowledges that it’s possible to craw up many a technical chart of a “startling nature,” he showcased one in a note circulated Monday that induces some stomach churning.

Striking Similarities

“The similarities between historical precedents and stock market movements are intriguing,” Hong said. “It is worth taking a note.”

President Donald Trump’s move to rein in Chinese imports parallels U.S. legislators’ outrage over Japan decades ago, according to Hong. In July 1987, U.S. congressmen smashed a Toshiba radio with sledgehammers after the company sold machine tools to the then-Soviet Union, and legislation was sent to the White House restricting trade.

Those tensions were a “seldom-discussed catalyst of the historic stock market crash in October 1987,” Hong said. Equity benchmarks such as Hong Kong’s Hang Seng Index are now mirroring the Dow Jones Industrial Average just before that collapse, he added.

In the same way that China is now pursuing a leading role in the global technology industry, Japan in the 1980s emerged from the shadow of the U.S. by advancing in high-value-added fields from machine tools to automobiles, threatening American competitors, the analyst said.

“Less than two months later, the U.S. market peaked, and then saw an epic plunge on the Black Monday,” Hong noted.

Perhaps the good news: that sell-off offered a golden “buy the dip” opportunity.

— With assistance by Matt Turner