INVESTMENT OUTLOOK : ASSESSING 1987 : DOW DRAMA : The Month-by-Month Turns of the Industrial Average

Long ago, J. P. Morgan was asked what he thought the stock market would do. “It will fluctuate,” he replied. But in 1987, the market did more than just fluctuate; 50-point daily swings in the Dow Jones industrial average eventually became ho-hum events.

As 1987 dawned, despite a 4-year-old bull market, there was general optimism that the good times would continue. Indeed, in the first four months of the year, the Dow average surpassed five new century marks and kept climbing until hitting its high-water mark of 2,722.42 on Aug. 25. At that point, the Dow was up a breathtaking 44% for the year.

Before long, however, things were turned upside down. Along came Oct. 19, a.k.a. Black Monday, and the Dow suffered its staggering 508-point loss.

As the following month-by-month Dow score card reveals, it is far easier to conduct a post-mortem than it is to predict a disaster.

January, Close: 2158.04, Up: 262.09

5 The Dow sets the first of many records in 1987, closing at a record 1,971.32 on a record 44.01-point climb. Institutional buyers load up after the tax-related selloff in December. Domestic oil prices dip below $18 a barrel. Market timer Robert R. Prechter Jr., who puts out the Elliott Wave Theorist newsletter, tells Barron’s, “The third and last wave is ahead of us. And in terms of Dow points will turn out to be the most spectacular of all. That’s the one I expect to carry us up into that 3,600-plus area.”

8 The Dow closes above the 2,000 mark for the first time at 2,002.25. Barron’s editor Alan Abelson would explain the surge: “Our own conviction is that Wall Street was celebrating the fact that no one had been indicted for at least three days. The other equally compelling theory is that as part of his settlement with the SEC, Ivan Boesky agreed to put in 500 hours at hard labor, carrying rumors and lifting prices.”

21 After a record 13 consecutive up closes, the Dow finally loses ground, down 10.40 points to 2,094.47. 22 “American stocks look very attractive,” says Sado Suzuki, chief investment strategist for Japan’s Daiwa Securities. The Dow jumps a record 51.60 points.

23 In an extraordinary 70 minutes of Friday afternoon trading, the Dow plummets 115 points, finishing the day down 44.15 points on record Big Board volume of 302 million shares. “I hadn’t expected anything this insane,” says economist John Kenneth Galbraith. But Shearson Lehman Bros. senior trader Alex Tellerico blamed much of the loss on the fact that many Wall Street traders had to stay in hotels during the week because of a commuter railroad strike. “We’ve got guys who haven’t been home all week,” he says.

February, Close: 2223.99, Up: 65.95

2 Business Week’s cover story is, “Oh, That Market.” The magazine suggests, “Relax: Stocks aren’t out of touch with reality--they’re adjusting to it.” Alan Greenspan, president of the consulting firm Townsend-Greenspan & Co., expects earnings per share for the 500 companies on the Standard & Poor’s index to rise at least 10% in 1987 and in 1988. “A significant valuation has not been fully appreciated by investors,” he says. The Dow closes up 21.38 points.

5 The Dow closes above 2,200 for the first time at 2,201.49. The Mutual Fund Forecaster newsletter advises, “Our econometric forecasting model shows that the bull market still has a green light,” and predicts a 19% gain for the S&P; 500 index in the next 12 months. During the first week of February, the median price-earnings ratio (that is, the ratio of share prices to annual earnings per share) of big board stocks is 17.

23 Charles Allmon, chairman of Growth Stock Outlook Trust, a $140-million mutual fund specializing in smaller companies, remains bearish. “We’re looking at excesses in the Dow Jones averages that we’ve only seen four or five times in the last 65 years,” he tells Barron’s. “I think it more closely parallels 1937, when the Dow was off 48% in about a year. We could see something like that. . . . But I don’t think we’re going to see the old type of bear market, where it runs on for a year and a half or two years. It’s going to be much more rapid because of the volatility brought to the market by program trading.” The Dow closes off 18.7 points.

March, Close: 2304.69, Up: 80.7

20 The Dow cracks the 2,300 barrier, closing at 2,333.52.

23 Business Week reports that John J. Phelan Jr., chairman of the New York Stock Exchange, is worried about computer programmed trading. “Phelan fears that program trading could trigger an uncontrollable ‘financial meltdown,’ in which the stock market could sink 150, 200 or more points in a day.” The Dow closes up 30.26 points.

30 The dollar falls to a post-World War II low against the Japanese yen at 146.25. The Dow closes down 57.39 points, its third-worst drop in history. William Ruane, money manager for Ruane Cunniff in New York, tells Fortune that he is putting as much as 50% of his clients’ money in Treasury bills. “People pay me to buy undervalued stocks, not fairly valued stocks, and certainly not overvalued stocks,” he says. “It is my experience that in this late phase most of the money that’s made--and more--is given back when the bull market ends.”

April, Close: 2286.36, Up: 18.33

3 The Dow jumps a record 69.89 for the day, closing at 2,390.34. “I would have given you 100-to-1 odds against the market performing like this,” says David Dreman of Dreman Value Management in New York.

13 In the final hour of trading the Dow sinks 45 points, and closes down 51.71 to 2,287.07. There is concern over the forthcoming U.S. trade deficit report. Texaco files for Chapter 11 bankruptcy protection because of its legal troubles with Pennzoil. Gary Hart announces his candidacy for president.

14 The Commerce Department reports that the U.S. trade deficit grew to $15.06 billion in February, versus a January deficit of $12.27 billion. The dollar hits another post-World War II low against the yen, at 140.80. “Now the Japanese have switched back to buying in their own market,” says Tim Smalls, vice president of equity trading for Shearson Lehman Bros. Analysts had expected the Japanese to invest $50 billion in the U.S. stock market this year. The Dow closes down 34.09 points.

22 The Dow drops 51.13 points as the market fears the Federal Reserve will tighten credit to support the dollar. “Trying to catch a bottom in this market is like trying to catch a pitchfork,” says Ben Niedermeyer, the Janus Value Fund’s portfolio manager.

May, Close: 2291.57, Up: 5.21

4 Gary Hart and Donna Rice are an item. The Dow closes up 5.82 points.

11 Joe Granville, the market timer of the early 1980s who fell into disgrace by missing the start of the bull market in 1982 and who remained bearish until early 1986, tells Barron’s he’s finally found religion. “At the end of last year, when the market was at 1,895, I said the market is a hell of a buy. And I projected 2,500-3,000 by the end of this year.” As for missing the start of the surge, Granville explains, “One of the big mistakes . . . in 1982, I was in a series of four golf tournaments, and right at the most critical time, I am out on the golf course. OK. Now I have given all that up.” The Dow drops 15.00 points.

15 The Dow falls 52.97 points because of renewed concern about inflation. The Labor Department reports a 0.7% increase in producer prices during April. Some money center banks boost their prime rate to 8% from 8%. “I’m afraid it looks like a rerun of the stagflation of the early 1980s,” says Irwin L. Kellner, chief economist at Manufacturers Hanover in New York.

19 Citicorp announces that it will add $3 billion to its loan loss reserves, in large part because of bad foreign loans, which will result in a $2.5-billion second-quarter loss. At Berkshire Hathaway’s annual meeting in Omaha, Neb., company Chairman Warren Buffett, a self-made billionaire thanks to his conservative stock picking, tells shareholders he can’t find any stocks worth buying. The Dow falls 37.38 points to 2,221.28.

22 Short skirts from Chanel, Yves Saint Laurent, Calvin Klein and Karl Lagerfeld have arrived in the stores. As hemlines rise, goes the theory, so do stocks. The Dow closes up 17.43 points.

June, Close: 2418.53, Up: 126.96

16 The Dow records its seventh straight up session, closing at a record 2,407.35. Domestic crude oil prices remain above $20 per barrel. Output at U.S. factories rose a strong 0.5% in May, the Federal Reserve says.

22 The Merrill Lynch Market Letter advises, “The bull market is intact,” and predicts that the Dow average “could approach the 3,000 level in the next 12 to 18 months.” The Dow closes at a record 2,445.51.

25 The Dow closes up 22.64 points to a record 2,451.05. “With a market consistently hitting new highs in the past week, you don’t want to be a money manager explaining why you have a 15% or 20% cash position at the end of the quarter,” says Dreyfus Corp. analyst Monte Gordon.

26 At least 50 of every 100 transactions by corporate insiders this month were purchases, Market Logic reports, bettering the historical average of 35 buys per 100 transactions. “When America’s most knowledgeable investors are buying at an above-average clip, you can bet that higher stock prices are ahead,” the newsletter reports. The Dow falls 14.19 points.

July, Close: 2572.07, Up: 153.54

6 ZZZZ Best, the Reseda carpet cleaning company founded by whiz kid Barry Minkow, sues Minkow for fraud and announces that it will make a Chapter 11 bankruptcy filing. The Dow is off 7.17 points.

17 The Dow closes above the 2,500 barrier, closing at 2,510.04. The Granville Market Letter advises, “My long-term bullishness is fortified.”

24 Market Logic newsletter notes that last week, “the yield on the Standard & Poor’s 500 Index fell to just 2.78%, the second-lowest level since . . . the mid-1920s. . . . Simply put, the market today lacks fundamental value.” The Dow climbs 13.39 points.

August, Close: 2662.95, Up: 90.88

11 Alan Greenspan is sworn in as the new chairman of the Federal Reserve, replacing Paul Volcker. The Dow shoots up 44.64 points to close at a record 2,680.48. “You can’t wait for a correction anymore. If you’re managing someone else’s money, you have no choice but to buy,” says Hugh Johnson, First Albany’s chief investment officer.

13 The Dow celebrates the fifth anniversary of the bull market by climbing 22.17 points to a record 2,691.49.

25 The Dow closes at what turns out to be its peak for the year, 2,722.42. On the New York stock exchange, 135 stocks hit 52-week highs; only 16 stocks drop to 52-week lows. The dollar climbs 1.1% against the yen to 143.50, as the bond market strengthens. Standard & Poor’s 500 stock index is carrying a price earnings ratio of nearly 23. “It’s pretty much being taken for granted now that the market is going to go up,” says Jon Groveman, head equity trader for Ladenburg Thalmann.

September, Close: 2596.28, Up: 66.67

1 Marlin Fitzwater, White House spokesman, walks into his daily press briefing with a bottle of champagne marked “58 months,” to celebrate 58 months of economic expansion. “Reaganomics is working,” he says. The Dow falls 51.98 points, its fifth-worst daily drop, as the dollar weakens against the yen.

9 The market closes at 2,549.27;it has dropped 173 points from its Aug. 25 high due to concerns over interest rates, the weakness of the dollar and renewed tensions in the Persian Gulf. “I don’t think the market is going to go down a heck of a lot further,” says Bear Stearns investment strategist Peter Canelo.

11 The Commerce Department reports that our trade deficit hit a record $16.5 billion in July. Nevertheless, the Dow climbs 32.69 points, the best showing in three weeks.

22 The Dow records its biggest daily gain, up 75.23 points, as the Treasury Department reports the federal budget deficit fell slightly in August to $21.73 billion from $22.21 billion in July. “We’ve turned the corner. We’ve seen the lows for the rest of the year,” says Eugene Peroni Jr., a market analyst with Janney Montgomery Scott. October, Close: 1993.53, Down: 602.75

6 The Dow falls a record 91.55 points thanks to interest rate jitters and computerized sell programs. Analysts also say Robert R. Prechter Jr. helped drive down the market when he advised clients about a possible decline in the Dow.

9 The Granville Market Letter advises, “I would expect a higher market in the weeks ahead.” The Dow drops 34.43 points.

14 The Dow sinks a record 95.46, to close at 2,412.70. The Commerce Department reports that the nation’s trade deficit in August was $15.68 billion, down from $16.47 billion in July. But traders had expected a better showing.

15 “Conditions do not warrant ‘Apocalypse Now’ worries or scenarios,” says Treasury Secretary James A. Baker III. Chemical Bank raises its prime rate a half point to 9.75% as the Dow falls 57.61 points.

16 The Dow falls a record 108.35 points on a record 338.5 million shares traded on the big board as losers outnumber gainers 17 to 1. The average fixed 30-year mortgage rate hits a two-year high of 11.58%. “A lot of damage has been done, but this is the type of action you need to wash out and cleanse the system,” says Dennis Jarrett, analyst with Kidder, Peabody & Co. “We think the bull market is very much in place and that we will see new highs on the Dow in three to six months.”

19 It is sunny in Manhattan with temperatures in the mid-60s. Business Week’s new cover story focuses on the cable TV company Tele-Communications; Forbes has a cover story on the McKinsey & Co. consulting firm, and Fortune’s cover features, “Why Greenspan Is Bullish.”

As the market opens there is concern that the dollar will continue falling. The Dow plummets 100 points in the first hour of trading. Defense Secretary Caspar Weinberger announces that an Iranian offshore oil platform has been destroyed by U.S. warships in an early morning attack.

“Selling has reached hysterical and panic proportions and it’s worldwide. Clearly what’s happened is that people who made significant profits have had their confidence shattered,” says First Albany’s Johnson. “Everyone at once is running for the exits to keep what’s left of their gains.”

The ticker tape runs two hours late in the afternoon. SEC Chairman David Ruder says that a trading halt has been considered but that trading will continue. On the Chicago Mercantile Exchange, seven exchange seats are sold.

The Dow closes down 508 points, or 22.6%, to 1,738.74. (On Oct. 28, 1929, the Dow average fell 12.8%.)The carnage is massive. Stocks on the three major stock exchanges lose at least $500 billion in value. The New York Stock Exchange has a record volume of 604.3 million shares;1,068 Big Board stocks hit 52-week lows, including IBM, which closes at $103.75, down $31.75;Westinghouse Electric closes at $40.25, down $20.25, and Coca-Cola closes at $30.50, down $10.

On the Hong Kong stock exchange, the leading index plummets a record 11%; in London a major index falls 10.8%, and the Mexican stock market falls nearly 20%.

“I don’t know what meaning it might have because all the business indices are up. There is nothing wrong with the economy,” President Reagan says. Historians note the similarity of his remarks with those of President Herbert Hoover’s in October, 1929: “The fundamental business of the country . . . is on a sound and prosperous basis.”

20 The Dow climbs a record 102.27, although losers outnumber gainers on the New York exchange 5 to 2. A flood of corporations announce new or expanded stock buyback programs, including Ford, Chrysler, Citicorp and McGraw-Hill. Three small securities firms close. Rumors persist that E. F. Hutton is in serious financial difficulty, despite the company’s denials. The Dart Group Corp. withdraws its $68-a-share takeover bid for retailer Dayton Hudson. At current prices, it is estimated that the group will suffer a $70-million loss on its investment. Dayton Hudson’s stock closes at $28.75.

In London, a leading stock index loses another 12.2%. Britain’s Chancellor of the Exchequer Nigel Lawson says of the worldwide stock plunge, “I don’t know what the reasons are. Nobody ever does, and it’s foolish to pretend.”

21 Johnny Carson on “The Tonight Show”:”I was scared when I saw you waiting in line. I thought it was the first official bread line of the new Depression.

“I ran into my stockbroker today on the street. I didn’t mean to. He jumped in front of my car.

“Things are worse than I thought. The president opened his address by saying, ‘Good evening my fellow Okies.’

“Yesterday E. F. Hutton talked and people said shut up and go away.”

Variety’s headline reads: “Wall Street Lays an Egg: the Sequel.”

The Dow jumps a record 186.84 points to close at 2027.85, as eight out of nine stocks advance on the New York exchange.

22 The New York Stock Exchange announces that it will close two hours early for several days to process paper work. The Dow drops 77.42 points.

26 The Dow falls 156.83 points to close at 1793.93. Elaine Garzarelli, an analyst with Shearson Lehman, says, “Everybody is shellshocked and nobody knows what to think.”

In Miami an investor who suffered big stock losses kills a Merrill Lynch office manager and wounds a broker before killing himself.

28 Comedian Jay Leno on “The Tonight Show”:”Do you know what day this is? It’s the 58th anniversary of the 1929 stock market crash. Of course, that’ll never happen again.” In the first calm day of trading in three weeks, the Dow edges up 0.33 points.

29 Discount brokerage Charles Schwab Corp. says that it expects to post a $22-million charge in the fourth quarter, because a few big clients could not meet margin calls. The Dow climbs 91.51 points. By the close of October the median price-to-earnings ratio of New York Stock Exchange issues has dropped to 13.

November, Close: 1883.55, Down: 159.98

4 Ronald Reagan: “And if there’s one thing I’m not going to do in this job is give advice on the market.”

Johnny Carson: “I asked my broker today what I should buy. He said, ‘Two guns. We’ll go together.’ ”

John Akers, chairman of International Business Machines:”The IBM company is planning for growth next year despite what happened in October.”

The Dow closes down 18.24 points to 1,945.29.

12 Johnny Carson: “You people are lucky. You got in free. We’d charge you admission--if the dollar was worth anything.”

The Commerce Department reports the U.S. trade deficit declined to $14.1 billion in September, compared to $15.7 billion in August. “This buys some time for the dollar. But it’s still an awfully large number,” says Manufacturers Hanover’s Steven Cerier. Chrysler notifies 3,500 white-collar workers that they will be laid off. The Dow jumps 61.01 points to close at 1,960.21.

23 E. F. Hutton announces that it is hunting for a merger partner because it needs a cash infusion. Chrysler announces indefinite layoffs for 2,900 hourly workers because of slowing car sales. The Dow climbs 9.45 points to 1,923.08.

24 The Dow shoots up 40.45 points as the Commerce Department estimates that economic growth was a solid 4.1% annual rate in the third quarter.

30 The Dow closes off 76.93 points, after being down almost 110 points earlier in the day. The dollar sinks to new lows against the yen before the Bank of Japan starts buying dollars. “Investors seem to be totally confused about whether to prepare for recession or inflation,” says Kidder Peabody trader Thomas Ryan. Paine Webber announces that it sold an 18% stake for $300 million to Yasuda Mutual Life Insurance in Tokyo. Market timer Robert R. Prechter Jr. tells Business Week that the Dow could fall below 400 by the early 1990s, to be followed by a depression and then maybe a war. Market strategist Alfred E. Goldman of A. G. Edwards & Sons says, “December is going to be a wild month.”