VIEWPOINT : HOW SAFE ARE STOCKS? : Five analysts say the market may be a little overextended but none believe that a repeat of the 1987 crash is imminent.
With the Dow Jones industrial index hovering around the 2,700 mark, the index is within striking distance of the record high of 2,722.42 set two years ago--shortly before the October, 1987, stock market crash. Is the market on the verge of another collapse? Times researcher Melanie Pickett asked five stock market analysts for their opinions. Excerpts of the interviews follow.
Stan Weinstein, editor of the Professional Tape Reader:
“I don’t expect another October, ‘87-type crash. That’s the good news. For the bad news, I don’t think that the rally is as good as everybody thinks, and I think that it’s going to end before the year is out.
“Starting with the long-term trend (six months to a year), it’s still up. I see no signs yet on the long-term basis that the bull move is over. . . . It’s a very selective market and you can lose money even with the averages going up. Because there are lots of stocks that I feel have topped out and seen their high for the cycle already. So, yes, (the market) is still going up but it’s a selective market--it’s not a great rally. And when it’s this selective, it usually is an indication that you’re late in the game.
“Short-term (the next two to three months) is another story. Short-term is very overbought, and I think there’s going to be a correction. But, again, I’m not looking for devastation. I don’t see an October, ‘87, right here. I just see that the market is overextended and is likely to pull back.
“At any time, if the Dow Jones industrial average closes below 2,420, that’s a sell signal. That’s the start of the next bear market. It may not happen for six months, but at any time if you close below 2,420, forget about corrections.”
Elaine Garzarelli, an executive vice president of the Shearson Lehman Hutton investment firm, who in September, 1987, accurately predicted the following month’s stock market crash:
“If the long-term bond rate stays where it is and doesn’t rise any more, which is what I’m anticipating, then the market has the potential--on the Dow anyway--to go to the 2,850 to 3,000 level. At any time, however, we can be subject to corrections in the market of about 4% to 7%. And we’re probably ready for one. I would think in the next several weeks we could have some sort of a pullback. But I don’t think this is the final top.
“Prior to the crash, the dividend yield on the Dow Jones was 2.6%. (A dividend yield is the ratio of current annual dividends to current stock price.) For that to occur now, that would be a Dow Jones of 3,500. So we’re not anywhere near the kind of over-valuation that we were then.
“The other thing is, on the bottom of the market Dec. 4, 1987, the dividend yield on the Dow was 4%. To get to a 4% dividend yield, the Dow would go to 2,300. So the downside, the worst, is 2,300. . . . And the upside, considering the average dividend yields for the market peaks of the last 35 years, would be about 3,071. So I think there’s more upside. What would make this forecast go bad would be if interest rates started to rise quite dramatically. “If we get this pullback, then (the individual investor) should be buying into the pullback. I wouldn’t be buying right now. Institutional investors should just stay fully invested.”
Joseph P. Hardiman, president of the National Assn. of Securities Dealers:
“Fundamentally--in terms of economics, in terms of price-earnings ratios, in terms of the stock market versus the bond market--in August of 1987 the market was overpriced. Today, those fundamentals are different.
“You have a price-earnings ratio that is more in an acceptable historical range--depending on which index you’re using, the 1 to 13 range versus the 18 to 20 range that you saw in the August, 1987, period. You’re seeing interest rates trending down rather than up as they were in August and September of ‘87, and that’s helping the stock market because it makes stocks relatively more attractive.
“And the economy itself seems to be stronger. The Gramm-Rudman bill has been adopted and is in place, and there is the appearance that Congress and the Administration are working hard to at least maintain our budget deficit within some degree of control. And our trade deficits over the past 12 months have been more attractive than they were in the 12 months preceding 1987. So you’re seeing a much stronger underlying health of the marketplace than we saw in August of 1987.
“There is one caveat. There is one area that’s troublesome that bears close watching. And that is that the amount of leverage you can employ in futures trading is even greater today than it was in August of 1987. The margin requirements for trading futures contracts are lower today than they were in August of 1987. Speculation in the futures markets, which in turn could have an impact upon the equity markets, is encouraged by low margin requirements. If it continues and speculation increases in the futures market, then you could have a troublesome situation occur again.
“I don’t see, with the fundamentals and the systems that have been vastly improved, that we’re going to see a fall similar to the one we saw in October of 1987, but you could have a correction if this disparity between the amount of leverage that you can use in the futures markets and the amount you can use in the equity markets continues to grow.”
Dave Allman, editor of the Elliott Wave Theorist Hotline:
“We do see the largest bear market correction in over 60 years occurring. Whether or not that comes in the form of a crash or as a slow but steady erosion is not something we can forecast. But we do anticipate that bear market correction. We think that the market is very, very close (to a peak), if the peak has not already been seen.
“The average investor would be much better served by being completely out of the U.S. equity market and preserving his or her capital in something along the lines of Treasury bills or some other type of government-backed cash equivalent because there will be some terrific buying opportunities three to five years down the road. But preservation of capital is of utmost importance in a bear market.
“The overall technical background--that’s wage structure, market sentiment, investor psychology and momentum--is one of the most dangerous we have seen in many years and is commensurate with important tops over the course of the past 150 years and argues for a super-cautious approach to the stock market. . . . The average investor should be out of the stock market.”
Albert E. Sindlinger, chairman of Sindlinger & Co., a consumer research firm:
“I’m fearful of another slide in the market like we had in ‘87, which would put us into a recession. In ‘87, I was the only person who said there would be no recession from the stock crash because . . . 31 states that were in recession in 1986 (were) coming out. Now you don’t have a strong cushion.
“The market is on a precipice. We’re in a bear market correction. It’s not going to be today, that’s for sure, and I doubt if it’s going to be in the next couple of weeks, but after Labor Day I wouldn’t want to be in the market.”
