Bull of a Different Color : Differences Between '87 and Today Tell More Than the Similarities

By TOM PETRUNO

Aug. 20, 1993 12 AM PT

Depending on whom you ask, the stock market’s run to new highs is phony, overdone, unwarranted or unjustified. Or all of the above.

In short, Wall Street has a bad feeling that we’re at the end of the bull market that began in 1990.

But there’s a problem: Feeling bad isn’t supposed to be part of the deal when a bull market ends. We should be all caught up in the euphoria, feeling great about the money we’re making, not realizing that over-optimism usually slays bull markets.

It’s intriguing that people are again obsessed with the idea of a market top, almost six years to the day that the great bull market of the 1980s peaked. Comparing that market to this one is very instructive.

The Dow Jones industrial average, which inched up 7.27 points to a record 3,612.13 on Thursday, now is 33% above its Aug. 25, 1987, peak of 2,722.42--a peak that was the last hurrah before the 508-point crash in October of that year.

Then, as now, money was pouring into stocks worldwide. Then, as now, the typical U.S. blue-chip stock sold for about 20 times its annual per-share earnings, which is about as expensive as the market ever gets.

But that’s about where the similarities end. And the differences are much more telling:

* In August, 1987, the global economy was booming, and the big worry was that business activity was close to overheating--a sure-fire bull market killer. Today, describing global growth as anemic is being kind.

* Then, rampant bullishness suggested that the majority, as usual, would be fooled. The Investors Intelligence weekly poll of investment advisers nationwide showed 60.8% bullish at the market peak that August. Today, only 41% of advisers are bullish. (The rest are either short-term cautious or long-term bearish.)

* Then, if the stock market disappointed you--even a little--you had plenty of other safe, high-paying options to run to. A six-month bank CD, for example, yielded 6.71%. Today, you get 2.83% at the bank--which is actually a negative real return after inflation.

In the Wall Street Journal’s daily stock market story Aug. 26, 1987, here’s how Jon Groveman, a veteran trader, described the market’s tone the day before, which of course neither he nor anyone else could have known was the peak:

“In a market like this, every story is a positive one. Any news is good news. It’s pretty much taken for granted now that the market is going to go up.”

Does that sound like today’s market? Hardly. This is a bull market that nobody is really enjoying, because it feels somehow undeserved. Which is exactly the way Americans have been conditioned to think about anything good in the austere ‘90s.

The point is, we all know the stock market isn’t going straight up forever. But for now, anything more than a temporary selloff appears highly unlikely, because the good news driving this market actually is good news: Interest rates are still coming down worldwide, corporate profits in the United States are rebounding (and will probably do so in Japan and Europe next year), and the global economy has nowhere to go but up.

More important, what appears to be lost on many worried market pros is the magnitude of the mind-set change that is driving individual investors into financial markets today--to the tune of $20 billion a month in net new cash investment in stock and bond mutual funds.

Why are stocks going up? Because most people feel the need to own them for the long haul, not for overnight riches.

Richard Hokenson, chief economist at Donaldson, Lufkin & Jenrette Securities in New York, puts it this way: “Not only is most of the population growth occurring in age groups where retirement is (looming) as a reality, but people have also begun to realize that whatever they expected their home to be worth when they retire was grossly inflated.”

Despite the cherished Wall Street view that small investors are dopes, Hokenson argues the opposite. Individuals, he notes, were by and large selling stocks and buying real estate in the 1970s, which was precisely the intelligent thing to do in that inflationary era.

Now the long-term view is that inflation isn’t coming back. So small investors, Hokenson says, have recognized that the only proven vehicle for capital gains in a low-inflation environment is the stock market. “People are behaving as if the world has changed,” he says, because it has.

When will investors stop throwing money at stocks? If the market suddenly plummets because of some international event, that will probably be enough to give some investors pause.

But if little else changes--inflation and interest rates fail to rocket, real estate doesn’t improve, the economy doesn’t fall off a cliff--it probably won’t take long for investors to gather their wits, focus on their retirement needs and start writing those checks again to their favorite stock funds.

Some trends are so big they can only be recognized from a distance, years later. It’s a good bet that the current worldwide shift into stocks is one of those.

1987, All Over Again?

With the stock market hitting new highs, Wall Street fears that it is reliving the August, 1987, market peak. But many experts see more differences than similarities between then and now.

The Dow is higher...(Dow Jones industrial average)

Aug., 1987, peak: 2,722.42

Now: 3,612.13

Aug., 1987, peak:

Bullish: 60.8%

Bearish or cautious: 39.2%

Now:

Bullish: 41.0%

Bearish or cautious: 59.0%

30-year Treasury bond yield

Aug., 1987, peak: 8.90%

Now: 6.20%