The stock market gave everyone a terrifying glimpse into the abyss last week.
What happened was a certifiable financial panic, and it did more than stop the bull market in its tracks. It probably shattered the sense shared by many Americans, including investor and stock market professionals, that nothing would go fundamentally wrong with their economy.
The week ahead is a question. Some analysts say the market will attempt a rally; others see a ”trendless” drifting. All agree that the low hit last Monday will be tested, and perhaps breached, in the next several weeks.
”This was not a normal stock market correction,” said Hugh Johnson, chief investment officer for First Albany Corp., Albany, N.Y., and a market historian. ”This is not a bear market. This was not a pullback. It was a financial panic. It was global and its implications for the world are probably far-reaching.”
The market did not experience meltdown, as seemed likely Monday afternoon when the bellwether Dow Jones industrial average was crashing downward 100 points at a time. But it did carom wildly all week in an 800-point range, like a bear in a china shop.
Miraculously, Wall Street and its Chicago counterpart LaSalle Street managed to cope with the unprecedented volatility and volume. But Black Monday and its aftermath represent a sharp break with the recent past.
It remains to be seen whether the ”Crash of 1987” becomes the symbolic beginning of an economic depression, as did the Crash of 1929. Johnny Carson made the connection last week in his monologue, reminding everyone that Daylight Saving Time ends this weekend, ”so don`t forget to turn your clocks back to 1929.” He hit a little too close to the bone. There was only light and nervous laughter among his ”Tonight Show” audience.
In his weekly radio address Saturday, President Reagan repeated his assessment that the U.S. economy is in good shape despite the market decline. He urged Congress not to jeopardize growth by raising taxes.
”The American economy is strong and sound,” Reagan said, referring to recent figures which show growth in the gross national product and a low inflation rate.
”Though the market has been volatile, let`s remember if corrections or fluctuations do occur, that as long as consumers do not overreact by losing confidence, our expansion will continue,” he said.
Meanwhile Saturday, the Tokyo Stock Exchange closed with a moderate gain after heavy early trading sent share prices soaring.
Last week ended with some positive economic news, an exhausted market down, but certainly not out, and the first signs of a break in the deficit stalemate.
Market analysts and traders used words such as ”hurricane,”
”earthquake” and ”avalanche” to describe the force of last week`s financial panic. And some believe the week`s collapse, like those natural disasters, won`t have long-term implications when the immediate damage is cleaned up.
”Markets go up; markets go down. The little guy gets in. Maybe he gets in a little over his head, loses money and stays out for awhile. But then he gets back in again,” corporate raider T. Boone Pickens said Friday. ”That`s how the free market works.”
”This was a bizarre event,” said Richard Ross, executive director of the Chicago-based Center for the Study of Investor Behavior. ”It is outside of people`s normal experience. These things aren`t internalized.”
He likened it to the reaction of people reading about a plane crash. They are stunned, but a week later it`s over and people are flying around like they did before.
”Assuming that the market stabilizes at some point above the crash level,” he added, ”this will have a very short half-life.”
But Johnson wasn`t so sure. Before last week, he said, there had been three financial panics in the 20th Century, in 1907, 1914 and 1929.
”We don`t know now what this means but the tools we have used to forecast aren`t good enough anymore,” he said. ”The picture is exceptionally unclear. The possibility has been raised that indeed the economy may turn down in 1988.”
The stock market crash in October of 1929 did not immediately usher in the depression. By the end of that year, the market had regained most of its loss. It was only after a series of disastrous financial policy decisions and the failure of the private, but ominously named, Bank of the United States that the economy settled into the Great Depression of the 1930s.
Some like to believe the long-term effects of last week will be limited to the professionals-brokers, traders, arbitragers, investment bankers-who were shaken to the core on the trading floors of New York and in the Chicago pits. And there could even be detected a certain moral satisfaction that the greedy and arrogant got what was coming to them. But the ripple effects on consumer confidence may be far-reaching because, for many people, their standing in the financial markets translates into how well-off they are. Do they feel richer or poorer? And from that intangible feeling flows decisions to buy or not to buy houses, cars and all the other goods that keep the American economy humming along.
”Confidence in the markets has been seriously damaged,” said Johnson. The damage came not just from the 508-point drop Monday, which was preceded by three record-breaking drops in the previous two weeks, but also by the increasingly wild swings. ”The volatility of the markets has simply frightened, intimidated and overwhelmed investors.”
He added: ”It will take time to restore, and it won`t happen overnight.”
By the end of the week, the sheer strain of keeping the system operating under the crushing load had begun to take its toll. People who were at the center of the storm-the brokers and traders-were disoriented and exhausted and the computer systems that made all that trading possible had reached their limits.
Though trading hours were shortened by two hours Friday and will be again Monday and Tuesday, the people who run and work in the markets were faced with long hours over the weekend and beyond to clear the processing backlog.
But the doors stayed open, and New York Stock Exchange Chairman John Phelan said that, in itself, was an accomplishment. The Big Board considered closing shortly before noon Tuesday when it appeared that the market might be about to repeat its tailspin.
”We decided to tough it out,” he said. Chaotic as it was, the decision to keep U.S. markets open sent an important psychological signal around the world, analysts say. Phelan called the week ”a wingdinger. It`s not one I will have any trouble remembering.”
Restrictions on index-related program trading, which add to volatility by moving the market with lightning speed in whichever direction it is going, were still in effect at week`s end. If and when those restrictions are lifted, many believe, those derivative products spawned in the Chicago futures and options markets may never be the same.
That computerized program trading is the focus of a spate of investigations. Regardless of the outcome, there will be a long-term impact in the Chicago markets, said Ross from the investor-behavior center.
”The guys in the pits are really hurting,” he said. ”They will be very reluctant to play the games as they have in the last five years. I don`t think those markets will ever be as liquid again. I am not going to predict that they will diminish but they will change.”
