With August Here, Look at the Market, Not the Calendar
Fifteen years ago today, whatever you were busy doing probably was the wrong thing. What you should have been doing was sinking every last dime you had into the stock market.
On Aug. 12, 1982, the wretched 1970s bear market that had made stocks a four-letter word with most Americans was on its deathbed, breathing weakly.
The Dow Jones index of 30 blue-chip stocks--or “blue gyps” as they were known then, after a decade of lousy returns--eased 0.29 point that Thursday to 776.92, lowest since April 1980.
The next day, a Friday the 13th, the Dow jumped 11.13 points (a 1.4% move) to 788.05, and the great bull market we still enjoy today was born.
Who knew?
Not many. Ten years of high inflation, soaring interest rates and a diminishment of American power worldwide had turned most individual investors, and many institutional ones, against stocks. The Dow at 776.92 was 27% below its peak level nearly a decade earlier.
Yet that August, the collective mood of investors was changing radically. And since then, two other major market turns also have occurred in August--a fact that hasn’t been lost on Wall Street pros as they nervously eye stocks at today’s near-record heights:
* Ten years ago this month, on Aug. 25, 1987, the first phase of the bull market ended, when the Dow peaked at 2,722.42 amid widespread euphoria and confidence that after five years of big gains, the market was just warming up.
Two months of slow decline followed, leading up to the devastating crash of Oct. 19, when the Dow plummeted 508 points to 1,738.74.
* Seven years ago, in August 1990, the brief but wrenching bear market of that year went into full swing, in the wake of the Iraqi invasion of Kuwait on Aug. 2.
The Dow sank from 2,905.20 at the start of that August to 2,483.42 by Aug. 23--a 15% decline--before rallying back to 2,614.36 by the end of the month.
The index would sink again in September and early October, bottoming at 2,365.10 on Oct. 11.
*
Today, with the Dow at 8,062.11, both the 1987 and 1990 market declines look like mere blips on a chart showing the market’s long-term rise.
But those blips were extremely painful bear markets for many investors in 1987 and 1990. From peak to trough in 1987, the Dow lost 36%; in 1990, the total decline was 21%.
Looking even further back, the wild bull market of the 1920s missed reaching its zenith in August by just one day: In 1929, the Dow peaked at 381.17 on Sept. 1, after a 9.4% surge that August. By the end of that year, the index had tumbled 35%--and the Great Depression wasn’t far behind.
Fast-forward to the present: Since 1990 the Dow has yet to lose even as much as 10%, despite several frightening pullbacks.
Veteran investors know that all too well, of course. Which is why the “August factor” weighs heavily on some Wall Streeters’ minds: If this month was a key turning point for the market in 1982, 1987 and 1990 (never mind 1929), could it happen again in 1997?
Not surprisingly, many market historians say there is no evidence that the August factor is anything but pure coincidence.
But Richard Russell, editor of the Dow Theory Letter, an investment newsletter based in La Jolla, suggests that it would be natural for many investors by the end of August to begin looking toward the next calendar year. In the business world, after all, the end of summer often brings a focus on spending and investment plans for the upcoming year.
If investors similarly begin to adopt a “What about the next year?” mind-set, they could conceivably come to have one of two views of the stock market each August: Either it’s too low relative to the economy’s prospects for the next year, or it’s too high relative to those prospects.
At the same time, whatever conviction about stocks may develop in August can be amplified by the simple fact that so many investors in the United States and in Europe are away from the market on summer vacation this month, notes Bill LeFevre, market strategist at Ehrenkrantz King Nussbaum Inc. in New York.
Many big institutional investors “are too busy trying to sink that 14-foot putt” this month, rather than paying attention to stocks, LeFevre says, only half-joking.
That means that the smaller number of players in the market can have a greater effect on its direction on any given day, LeFevre says.
He believes that that factor was key in the market turn of August 1982, and why it continued to build steam in September and October of that year.
Interest rates had been falling that summer, LeFevre remembers, as the Federal Reserve Board desperately pumped money into a battered economy that more than a few famous economists worried was headed for the first true depression since the 1930s.
But in mid-August 1982, with long-term Treasury bonds still yielding 13%, 30-year mortgage rates above 16% and oil still at $34 a barrel, many investors worried that the Fed was too late to save the economy.
As the Wall Street Journal stock market summary story read on Aug. 13 of that year, “Investors are on the horns of a dilemma because they want to believe we’re in a period of falling interest rates, but they also see the stark economic realities of layoffs, bankruptcies and dividend cuts.”
As stocks began to rise in mid-August, however, the mentality that stocks’ long period of woe was over--and that the economy under President Reagan’s free-market, anti-regulation administration was fundamentally changing for the better--began to take hold with more investors. The Dow surged 16% between Aug. 13 and Aug. 31.
And when the horde of vacationing money managers returned that September, LeFevre says, they naturally found it easier to go with the market trend than go against it. The rest is history.
*
In 1987, meanwhile, the same process may have been at work, but in reverse: By the time Wall Street got back from vacation that September, stocks were already sliding, albeit relatively slowly, after the Dow had leaped a stunning 44% between Jan. 1 and Aug. 25.
Is there a warning there, given this year’s remarkable Dow performance (up 25% year-to-date)?
Perhaps. But it’s the fundamentals that matter most in the market, not the page of the calendar.
In 1982, interest rates were plummeting, which would eventually jump-start the economy after the deep early-1980s recession. Stocks were, arguably, dirt cheap: Coca-Cola’s stock price-to-earnings ratio was all of 9; Citicorp’s P/E was a mere 4.
In 1987, by contrast, stock prices were extraordinarily high relative to earnings. And perhaps more important, interest rates were rising all year--which stock investors chose to ignore for most of that period, until higher yields finally overpowered investor sentiment that fall, leading to the October market crash.
*
And this year? Certainly, the same argument about stocks’ “scary” heights that applied in 1987 applies today. But investors also know that many things about the U.S. economy, the global economy and the inflation outlook are vastly more encouraging for the stock market today than in 1987: The Cold War is over, U.S. businesses are extremely competitive, global trade is disinflationary, and aging baby boomers believe they need stocks for the long haul.
What supports the bull market today are “all of those [positive] things you’ve heard about a million times,” says Yale Hirsch, publisher of Stock Trader’s Almanac in Old Tappan, N.J., and a market historian. But just because they’re well-known doesn’t make those factors less important, he notes.
Nonetheless, last Friday’s 156.78-point Dow plunge showed that stock prices still are determined in part by the level of interest rates. With long-term bond yields rising sharply last week after declining to 18-month lows in recent weeks, that is unquestionably the most vexing issue for investors today.
Eric Miller, investment strategist at Donaldson, Lufkin & Jenrette Securities in San Francisco, concedes that stocks are vulnerable to higher interest rates. Even so, he says, “I have trouble seeing a major pitfall” ahead for the bull market, unless bond yields were to rise dramatically or corporate profits were to crumble, or both.
Russell is less sanguine. “In August 1982, almost nobody could conceive of the Dow at 8,000 someday,” he says. In August 1997, he notes, few investors seem able to conceive of the Dow ever being substantially lower than today.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Happy Birthday to the Bull
Fifteen years ago this week, stocks’ great bull market was born. The Dow Jones industrial average bottomed at 776.92 on Aug. 12, 1982, amid worrisome signs that the recession of that era was getting worse rather than better. It was, as many veteran Wall Streeters remember, a time when owning stocks seemed to make no sense at all. But, in fact, that was precisely when investors should have been buying, as interest rates and inflation were primed to plummet. A comparison of some key market indicators then and now:
Item: Dow Jones industrial average
Aug. 12, 1982: 776.92
Monday: 8,062.11
Change: +938%
*
Item: Nasdaq composite stock index
Aug. 12, 1982: 159.84
Monday: 1,586.74
Change: +893%
*
Item: Standard & Poor’s 500 stock index
Aug. 12, 1982: 102.42
Monday: 937.00
Change: +815%
*
Item: 30-year Treasury bond yield
Aug. 12, 1982: 13.0%
Monday: 6.6%
Change: -- 6.4 points
*
Item: 6-month savings certificate yield
Aug. 12, 1982: 11.4%
Monday: 4.9%
Change: -- 6.5 points
*
Item: 30-year fixed-rate mortgage
Aug. 12, 1982: 16.1%
Monday: 7.5%
Change: -- 8.6 points
*
Item: Gold futures, per ounce
Aug. 12, 1982: $338.00
Monday: $328.20
Change: -- 3%
*
Item: Silver futures, per ounce
Aug. 12, 1982: $6.41
Monday: $4.43
Change: -- 31%
*
Item: Oil, per barrel
Aug. 12, 1982: $34.00
Monday: $19.69
Change: -- 42%
*
Item: NYSE trading volume (shares)
Aug. 12, 1982: 50 million
Monday: 481 million
Change: +862%
*
Item: General Electric price-to-earnings*
Aug. 12, 1982: 8
Monday: 29
Change: +263%
*
Item: Coca-Cola, price-to-earnings*
Aug. 12, 1982: 9
Monday: 38
Change: +322%
*
Item: Citicorp, price-to-earnings*
Aug. 12, 1982: 4
Monday: 17
Change: +325%
*
Item: AT&T; stock dividend yield
Aug. 12, 1982: 11.0%
Monday: 3.2%
Change: -- 7.8 points
*
Item: Number of stock mutual funds
Aug. 12, 1982: 340
Monday: 2,855
Change: +740%
* based on most recent 12 months earnings per share
Source: Times research
