DEJA VU? : History Not Expected to Repeat Itself in 1996
Despite the stunning decline in the stock market Friday, many experts cautioned investors not to panic or expect a replay of the market crash of 1987.
“There really is no comparison,” said John Buckingham, director of research at Al Frank Asset Management, publishers of the Prudent Speculator investment newsletter in Santa Monica.
On Friday, the 171.24-point decline in the Dow Jones industrial average amounted to a 3% drop, compared with the 23% drop on Oct. 19, 1987.
Friday’s decline “was a long overdue correction,” triggered by healthier-than-expected employment figures that presage higher rates, Buckingham said.
But much has changed since the market crash in 1987.
Interest rates are much lower than they were in the late 1980s, and inflation is well under control, both of which have helped fuel the 1990s bull market.
The 1987 stock market crash began on Friday, Oct. 16, when the Dow fell 108 points, or 4.6%, responding in part to rising interest rates. Markets worldwide were also tumbling.
Bolstered by strong corporate earnings, stocks had rocketed from January through August of 1987, with the Dow peaking at 2,722.42 on Aug. 25, up 44% from Jan. 1.
From there, however, rising bond yields and anxiety over a deepening U.S. trade deficit chipped away at stocks, leading up to panic selling on Oct. 16.
The bottom then fell out on Oct. 19, 1987, now known as Black Monday, when the Dow plunged a whopping 508 points, or 23%, in the largest one-day decline ever.
The panic continued early on Tuesday, Oct. 20, until a wave of buying suddenly hit the market, pushing the Dow up 102 points on Tuesday and then 186 points on Wednesday, and allowing the market to stabilize.
Two years later, almost to the day, the market’s second-largest drop occurred.
On Friday, Oct. 13, 1989, surprise news hit late in the day that the proposed $6.75-billion management-led buyout of United Airlines was coming apart.
Fears that the 1980s wave of mergers and acquisitions was ending spurred a wave of selling, causing the Dow to plummet 190 points, or 7%, to 2,569.26.
But worries of a replay of 1987 proved unfounded the next Monday, when the Dow regained 88 points. It remained above 2,600 for the next two weeks and continued to climb after that, until Iraq’s invasion of Kuwait in August 1990 triggered a bear market.
One important difference in the 1989 market plunge, compared with 1987, is that the Federal Reserve Board acted quickly to avert a market meltdown by pumping money into the financial system on Monday morning, instead of waiting until Tuesday as it had in 1987.
Moreover, government officials cooperated in acting smoothly, a contrast with 1987, when conflicting statements and rumors that then-Securities and Exchange Commission Chairman David S. Ruder would close markets contributed to a Monday morning panic.
This time around, many government officials insisted Friday that there is nothing fundamentally troubling about the interest rate or inflation outlooks.
Federal Reserve Bank of San Francisco President Robert Parry gave assurances Friday that the U.S. economy isn’t likely to see an acceleration of inflation this year, whatever the job figures suggest.
Speaking to the Securities Industry Assn. in Litchfield Park, Ariz., Parry predicted that inflation would remain between 2.5% and 3%.
In any case, the markets have since 1987 taken steps to forestall a replay of Black Monday. A new computer system on the New York Stock Exchange was installed long ago to avoid the logjams that delayed trading and fueled the sell-off fires in 1987. Also, so-called circuit breakers are now in place to halt trading if the market falls by a certain amount.
On Friday, the Dow came within 33 points of triggering one of the circuit breakers that would have halted trading for an hour, allowing investors time to regroup.
Perhaps the most important difference from the late 1980s: Much of the money that has come into stocks in the 1990s has done so via retirement accounts. Many analysts believe that investors are unlikely to make large shifts with that money--or stop buying stock mutual funds abruptly--because that capital is considered a long-term investment.
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A Look Back at the Dow
Milestones for the Dow Jones industrial average of 30 stocks:
July 3, 1884--First stock average published by Dow Jones appears in the Customer’s Afternoon Letter, forerunner of the Wall Street Journal.
Sept. 3, 1929--Reaches peak closing of the bull market of the 1920s: 381.17.
Oct. 28, 1929--Plummets 38.33 points, losing nearly 13% of its value, to close at 260.64.
Nov. 14, 1972--Closes above 1,000 for the first time, at 1,003.16.
Dec. 6, 1974--Closes at a 12-year low of 577.60, ending the worst bear market since the 1930s.
Jan. 8, 1987--Breaks 2,000, rising 8.30 points to close at 2,002.25.
Oct. 19, 1987--Plunges a record 508 points to 1,738.74, a drop of 22.6% that came to be known as the Black Monday crash.
Jan. 24, 1989--Rises 38.04 points to 2,256.43, regaining its level of Oct. 16, 1987, for the first time since Black Monday.
Oct. 13, 1989--Falls 190.58 points to 2,569.26 in what was later dubbed the Friday the 13th mini-crash.
Jan. 2, 1990--Rises 56.95 points to 2,810.15, reaching a record high for the first time since Oct. 13.
April 17, 1991--Rises 17.58 points to 3,004.46, its first close above 3,000.
Feb. 23, 1995--Crosses 4,000 with a rise of 30.28 points, closing at 4,003.33. The action came one day after Federal Reserve Board Chairman Alan Greenspan indicated to Congress that the Fed had finished raising interest rates for time being.
Nov. 21, 1995--Closes above 5,000 for the first time, rising 40.46 points to 5,023.55.
March 5, 1996--Rises 43.27 points to a record 5,642.42.
March 8, 1996--Falls 171.24 points to 5,470.45, its third-worst daily decline in terms of points, as signs of a surprisingly strong job market send interest rates rising sharply. But the 3.04% decline from a near-record level is not even among the Dow’s 100 worst.
Source: Associated Press
