In 1987, the Australian market crashed more because valuations were higher

November 7, 2017

Around the 30th anniversay of the 20th October 1987 share price crash, there was a lot of discussion of that crash, but there was litle discussion of why the Australian share crash was substantially bigger than the US share price crash in the 1987 crash.

 

In short, Australia had a bigger crash because Australian shares were substantially more over-valued than US shares at the time. By the  time the crash occurred, the cyclically adjusted price earnings ration for the All Ordinaries index was a very high 25. In contrast, the S&P500 index cyclically adjusted price earnings ratio was only 18, a 30% lower valuation than average Australian shares.

 

One morale of the story - if you buy shares when they are very expensive, there is a good chance that might have a large fall in value.

 A comparative chart of the 1987 crash for US and Australian shares is below.

 Articles at the 30th anniversary of the 1987 share crash.

 

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