I guess I need to put this up for the Record..from the WSJ on OCt's Past.
September 27, 1999
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October Is Looming
With Its Scary Echoes
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
The dollar is falling. The trade deficit has hit a record. Interest rates are up.
And, as if the stock market didn't have enough reasons to be nervous, October is coming.
Eight of the Dow Jones Industrial Average's 20 worst percentage drops have occurred in October. With the anniversary of last year's debt-market crisis approaching and a few parallels to 1987 (the crash year) piling up, pessimists are having a field day.
On Friday, the industrial average shed another 39.26 points to 10279.33, its lowest level since April. That completed its worst one-week point drop ever, at 524.30 points, but only its 26th worst percentage drop, at 4.9%. The index is down 9.24% from its record close of 11326.04 on Aug. 25.
"A lot of people are getting out those Dow 10000 hats again," mused Dan Mathisson, head of stock trading at D.E. Shaw Securities, recalling the celebrations in March for that milestone, which now could be revisited on the way down.
Is it a "correction" yet? The Standard & Poor's 500-stock index, at 1277.36, is down 9.97% from its July 16 closing high. That effectively meets Wall Street's rule-of-thumb definition of a correction, a decline of 10% or more.
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Notable Octobers
Year DJIA
% Change
What Happened
1929 -20.4% The 1929 crash; Great Depression
1957 -3.3 Suez Crisis, Sputnik; end of 1957 bear market
1966 +4.2 Vietnam War; end of the 1966 bear market
1982 +10.7 End of 1981-82 recession, bull market gathers strength
1987 -23.2 The 1987 crash
1989 -1.8 "Minicrash"; takeover stocks dumped
1990 -0.4 Iraq invades Kuwait; beginning of current bull market
1997 -6.3 Asia crisis; Hong Kong stock plunge
1998 +9.6 Russia default, Long-term Capital rescue
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No one really knows, of course, whether something worse is ahead. Some of the parallels with 1987 are certainly eerie. In the two months before Black Monday, Oct. 19 -- the day the industrial average plunged a record 22.6% -- the Federal Reserve raised its discount rate half a percentage point; the trade deficit widened; and the dollar fell as a major trading partner refused to lower interest rates.
All those things have happened in the past month, although this time the trading partner is Japan, instead of Germany. Last week's stock slide began Tuesday when the dollar fell close to a three-year low against the yen on news of a record trade deficit in July and the Bank of Japan's refusal to ease monetary policy.
"What's happened to the dollar is a recognition that returns are better elsewhere and the U.S. is not the safe haven that it was last year," says Stephen King, managing director of economics at HSBC in London. "So people are asking if they should continue to fund the U.S. ." As foreigners take their money elsewhere, the dollar and bond prices fall and interest rates rise.
Mr. King published a lengthy report in July arguing that the U.S. stock market is a bubble similar to those experienced by the United Kingdom and Japan in the late 1980s and Mexico in 1994. Experience suggests the U.S. bubble will burst, and recession follow, when rising interest rates undermine stock investors' excess optimism, he concluded.
If that's not pessimistic enough, technical analysts are finding warning signs in chart patterns. Eric Lake, who runs his own commodity-trading-advisory and money-management service (www.DowGuru.com), said three times this summer the industrial average just touched and failed to break a trend line that he traced back to Black Monday. Most ominous of all, the average peaked on Aug. 25, the same date it peaked in 1987.
Noting that the market crashed 55 days after its peak in 1929 and 1987, Mr. Lake said, "Oct. 19 is the target date: 55 days out."
Before you dump your stocks, however, take heart. There are major differences between the economy now and in 1987, the most important being that inflation is not rising (yet). Bond yields were shooting higher throughout 1987, whereas this year they have hung around 6% since June. And the dollar isn't so much falling as the yen is rising; the dollar remains strong against the euro.
"The real difference with 1987 was then the market was absurdly expensive by any rational gauge we had," Ed Kerschner, head of investment strategy at PaineWebber, says. When the industrials were up 40% for the year in 1987, the market was 40% overvalued when compared with inflation, interest rates and expected earnings, he says. At its peak in August, it was only 10% overvalued, and now Mr. Kerschner figures that it is about fairly valued and that a big drop from here would be a buying opportunity.
"Just as it overshot by 10% for a while, with some uncertainty it may overshoot 10% to the downside. But Dow 9000 is compelling just as 11300 was threatening."
Even the October superstition is misleading. September is actually the worst month, by percentage declines in the S&P 500, according to Yale Hirsch's Stock Traders' Almanac, and this September is likely to reinforce that title. October is only sixth worst, because despite all those horrible days, it also has seen some spectacular rallies. Indeed, the almanac says October has turned the tide in eight major bear markets, most recently in 1990.
The industrial average soared 9.5% in October 1974, near the end of the worst postwar bear market, and 10.7% in 1982, as stocks began what some consider the current long-term bull market. Last fall, while some stock gauges hit bottom Oct. 8, they rocketed skyward shortly afterward, thanks to a surprise Fed rate cut meant to thaw a freeze in the credit markets.
Still, investors tend to be as unnerved by how fast stocks fall as by how much. Technical factors often play a role in the speed of decline. Portfolio insurance, a strategy involving mechanical buying and selling of stock-index futures, aggravated the 1987 crash, and panic selling by hedge funds to cover losses in emerging markets probably fueled the 512.61-point drop on Aug. 31 last year. Although hedge funds are far less leveraged than last year, nobody knows what land mines might still be hidden in investors' portfolios that might aggravate another plunge.
And for those who believe the U.S.'s remarkable productivity growth and modest inflation provide an important cushion to stocks, Mr. King warns that investors in previous bubbles have mistakenly believed inflation and productivity had permanently improved. In those cases, depressed commodity prices and strong currencies often masked inflationary pressure, while productivity gains were never what "new paradigm" advocates claimed.
"At the peak of bubbles, people assume that strong growth will continue forever, accompanied by extremely low interest rates," Mr. King says. "When interest rates start to rise, it undermines both those beliefs. If you have the prospect of growth falling from 4% to 2.5% and at the same time interest rates rising, that combination, in a bubble situation, is very destabilizing, because it changes all the optimistic assumptions that supported the market in the first place." |
