Masochists are nevertheless out in force this week, reminiscing about Oct. 19, 1987 — infamous Black Monday — when the Dow industrial average plummeted 22.6%, the equivalent of more than 3,000 points today. With the benefit of hindsight, they're throwing in "lessons learned" for good measure.
Some of these lessons we agree with (never let program traders take control of the New York Stock Exchange), and some we don't (the chances of its happening again are "infinitesimal"). But some of the biggest caveats, in our opinion, have been left out altogether. To wit:
• Beware a new Fed chief. Especially a new Fed chief bent on establishing his anti-inflation bona fides.
Alan Greenspan has been given much of the credit for "saving" the market after the crash by promptly adding liquidity to the system. Less often noted, however, is the role he played in instigating the sell-off.
We still remember the summer of '87, when the Fed chairman designate appeared on Louis Rukeyser's "Wall $treet Week" TV show. In response to a question about the U.S. economic outlook, which at the time seemed pretty good, Greenspan said something to the effect that things would probably get worse before they get better.
Then, only weeks after being sworn in, Greenspan saw to it that his prediction came true: He raised the discount rate for the first time in 3 1/2 years — and the stock market crashed for the first time in 58 years.
Rates should be changed only for economic reasons. When policymakers try to "prove" themselves, it only creates mischief.
• Fear of inflation is almost as bad as inflation itself. Inflation was fairly modest in 1987. Yet, thanks to rising oil prices (Treasuries sold off that summer on inflation fears fanned by a "surge" in crude above $20 a barrel), everyone was convinced we were headed back to the 1970s.
But we weren't, just as we aren't today, thanks to the tech boom and far better management of Fed policy.
• Don't talk down your currency. When you do, what you're really telling people is your assets aren't worth what they paid for them. This will always cause selling.
View larger imageBut Greenspan opined that the dollar would likely drop further, and Treasury Secretary James Baker III, who earlier in the year had negotiated the so-called Louvre Accord with the other G7 nations to stabilize currencies, couldn't keep his mouth shut either.
Jawboning the dollar down to "punish" the Germans and others for running big trade surpluses with the U.S. created uncertainty about U.S. assets. Foreign investors don't like to think they could make a 10% capital gain on a stock, then see it erased by an unfavorable currency move.
• Don't ever vote for protectionist trade policies. They don't work, have seriously deleterious economic effects and make investors very nervous.
But in April 1987, dollar and bond prices plunged after Rep. Dick Gephardt, a candidate for the Democratic presidential nomination, foolishly proposed legislation to require cuts in trade surpluses by foreign nations, especially those in Asia. (Sound familiar?)
Observers had worked themselves up into such a lather about the trade deficit that two of the biggest down days in the market leading up to Black Monday came after the release of "disappointing" trade data.
• Don't criminalize capitalism. The worst excesses in the '80s weren't by those who engaged in insider trading — though some practitioners surely deserved what they got — but by the government's collect-as-many-scalps-as-possible attack on Wall Street.
The year 1987 saw a number of investigations, pleas and arrests of traders. They included Ivan Boesky, Martin Siegel, and a number of people at Drexel Burnham, Merrill Lynch, Paine Webber, Kidder Peabody and Goldman Sachs. Takeover king Carl Icahn also got investigated, and Boyd Jeffries of Jeffries & Co. pled guilty to two felonies.
All this led to the impression of a market that was rigged from behind the scenes. It really put a damper on things.
• Don't underestimate world events. People forget that in 1987, just like today, everyone was worried about tensions in the Middle East. Iran had hit a U.S.-flagged tanker on Oct. 16 with missiles, sending oil prices higher and creating concerns about war. Just five months earlier, Saddam Hussein had launched a missile at the USS Stark, killing 37 sailors. That's right: Iraq.
• Take what "experts" say with a grain of salt. The '87 market didn't suddenly turn south on Monday, Oct. 19. It topped nearly two months earlier and had fallen 500 points, or 18%, before the opening bell on Oct. 19.
A "bear market" usually is declared after the averages drop 20%. In other words, that fall's "correction" was verging on a bear market before the carnage of Black Monday.
Granted, much of the damage came in the three sessions before Black Monday. But analysts and money managers were relatively upbeat throughout.
After the Dow sold off 7% (to 2545) in late August and early September, portfolio managers were telling Investor's Daily (as we were known back then) that the market was "holding up" well and should "find a bottom" around 2500. One of the shrewdest analysts of his day saw the Dow at 3000 sometime in January 1988.
Wall Street was still shrugging as late as Oct. 6, after the Dow fell a record 92 points and the market was heading into its climactic two-week slide.
"A very normal pullback and profit-taking in a bull market" is how one analyst described the action. "The market is not in need of a resuscitator."
"I don't think we're in for a bear market yet," a top-performing money manager told us on Oct. 15, after the Dow sank another 58, "I still think we are correcting a bull market."
Even on Friday, Oct. 16, after the Dow lost 108 points, or 4.8%, on record volume, a senior market specialist with the nation's biggest brokerage thought "the bull market that began in '82 probably has more to go."
Then came Black Monday.
• Stay focused on the market itself. Anyone who was watching the major averages day-in and day-out, and who knew the difference between healthy and unhealthy market action, should not have been surprised when the bottom fell out.
As the chart above shows, no fewer than 11 of the 37 sessions between the market top of Aug. 25 and Oct. 19 were "distribution days" — with the Dow closing lower on an increase in trading.
That's more than enough to signal a market in trouble.
If that alarm bell wasn't a loud enough, acknowledgment of the Dow's first violation of its 200-day moving average since the bull market began in 1982 would still have gotten you out in time.
Yes, we know: All this is easier said than done. Besides, that was then, and this is now.
It's probably worth noting, though, that there's a new Fed chief in town now, that high oil and a weak dollar have rekindled inflation fears, that the Middle East remains as violent and volatile as ever and that Congress is swinging dangerously back toward protectionism.
Just a thought on this 20th anniversary.
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