To Robert Brooks, an industrial marketing consultant from Waukegan, the stock market is a casino run by short-term speculators. He has scaled back his stock holdings to invest in government bonds.
”The securities dealers must get rid of this huge sleaze element, but they won`t for pure selfish reasons,” he said. ”And since the dealers have said to hell with the investors, all I can say is to hell with them.”
Oct. 19, 1987, the day the stock market crashed, lives on in the minds of many Americans. Wall Street layoffs and thin trading in stocks are daily testimony to this.
But in a broader sense, America seems to have brushed off the stunning 508-point plunge in the Dow Jones industrial average of a year ago. The anticipated recession never materialized; people continue to spend money and unemployment is down.
The crash has become an economic puzzle. Was it a nonevent, the subject for some future trivia quiz? Or was it a warning of deep fissures in the U.S. economy and structural weaknesses in the nation`s capital markets?
In one sense, it was good that it happened. Without it, ”we might have had a recession,” said Robert Dederick, an economist at Northern Trust Co. He pointed out that just before the crash, the economy was poised for a big slowdown because interest rates were rising.
The crash electrified the financial markets, causing the Federal Reserve Board to pump fresh dollars into the economy. So, interest rates plunged and recessionary fears slowly dissipated as the economy responded positively.
But the swift economic snap back poses some pyschological dangers, said Alan Stoga, economist at Kissinger and Associates.
”It drove a further wedge between the economy and the financial markets,” he said. ”It told people that whatever happens on Wall Street has nothing to do with what happens on Main Street. I don`t happen to believe that at all, but that perception is now there.”
In Washington, many members of Congress felt that Wall Street got its deserts and that the crash would force it to get its house in order. Indeed, many reforms have been put into effect since the crash, but they have failed to lure many investors back to the market.
Despite the downplaying of the crash`s effect by some Wall Street brokerage firms, it still is a psychological albatross. ”It caused a broader realization of the fragility of both the economy and the markets,” Stoga said. ”A year ago, people weren`t as concerned about this fragility.”
Wendy Gramm, chairwoman of Commodity Futures Trading Commission, said it`s incorrect and unfair to say the crash had no effect on most people.
”There was a real impact,” she said, ”and it was an impact in the financial markets. Prices went down in a sector of the economy. People who sell or buy investments or who sell or buy for others have been affected in real terms. Their incomes have gone down.”
She likened the crash`s impact to the effect of lower oil prices in states such as Oklahoma and Texas. ”When the price of oil declined, it had an impact in oil-producing states. Does that mean the whole economy? Not necessarily.” But for people living in those states, the impact has been very real and, in some cases, very harsh, she said.
Some analysts believe that the crash is partly responsible for the mergers and acquisitions and foreign investment that have occurred this year. Lower stock prices, combined with a weaker dollar, made U.S. firms inviting targets.
Great Britain`s Tate & Lyle PLC bought Illinois` Staley Continental Inc. for $37 a share in July. Less than a year earlier, the company had been trading around $42 a share.
George Parry, a mergers and acquisitions analyst, said the Fed`s post-crash easing fueled a renewal of merger activity. ”Lower stock prices made more companies vulnerable to takeovers so the market flushed out a few more targets,” he said.
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In many cases, the sudden fall in stock prices forced corporations to act fast to recover shareholder value or risk takeover, said John McMillen, a food industry analyst with Prudential-Bache Securities Inc.
”Companies which feared takeover were faced with a choice: get their stock price up or else,” he said. ”The crash forced many food companies to make further restructuring moves.”
McMillen said that Kraft sold its Duracell division to raise cash and bought back its stock at the rate of 1 million shares a month to save itself. ”Kraft`s management is to be applauded for its financial acumen and the good they did shareholders,” he said. On the eve of the crash, Kraft`s stock traded at around $62 a share. It fell to $38, and is now back to around $60.
And Budget Rent a Car Corp. said a week ago that it is considering putting itself up for sale because its stock price does not adequately reflect the company`s value. A spokeswoman said the firm`s stock had fallen to $11 to $12 a share in the crash from around $15, and it has not recovered.
Though Americans feel much more confident about the economy a year later, there`s a definite feeling among economists that the crash was a warning about the unsustainability of the nation`s huge trade and budget deficits and its reliance on foreign capital.
”There was no real effect on the economy, but it gave us a foretaste of what could happen if foreign investors lost faith in us,” said Audrey Freedman, an economist for the Conference Board in New York.
In this sense, the crash proved to be a two-edged sword. It exposed the economy`s deep vulnerabilities, indicating that perhaps it could happen again if the right circumstances arose and Congress and the White House failed to deal with the budget and trade problems. But it also showed that the economy is much more resilient than might have been suspected.
Many market professionals thought a year ago that another depression was surely on the way, just as the 1929 Crash led to the Great Depression of the 1930s. But the circumstances then and now are much different. The economy in 1987 was a lot stronger than it was in 1929.
Among those who believe it could happen again is John J. Phelan Jr., chairman of the New York Stock Exchange. The exchanges in New York and Chicago have taken a number of steps to prevent another market plunge and have proposed shutting down trading briefly during sharp falls.
There is a sure way to prevent another crash, said Phelan. ”You can reduce volatility by taking all the liquidity and risk capital out of the market. But you pay a price for that,” he cautioned.
”You pay a price for managed markets, and you pay a price for free markets.” He believes freer markets ”net to net have better served the nation” and are being imitated around the world.
”But with free markets,” Phelan said, ”you get bumps, things that scare people.”
But scaring people also changes them. Shortly after the crash, investors moved their money into safer investments, certificates of deposit and Treasury bills. Studies by Money Magazine, for one, have indicated that this investment strategy is being followed to this day.
”If someone sold a bunch of stocks and put that money in certificates of deposit or insured savings accounts a year ago, I would guess most of that money probably is still there,” said John Snow, analyst at Chicago Corp.
”A lot of the mentality that created the rush to safety after the crash, a lot of those same fears are still out there. Even professional investors are keeping a lot of cash these days. Banks have done a lot of marketing based on insurance and investment safety as part of promoting CDs. They`ve been playing on those fears all year.”
Robert Marjan, vice president at American National Bank, said that ”we still see more safe, short-term investments than we did before the crash. But there`s a slow move back into riskier investments. People aren`t as nervous as they were.”
Phelan believes pension funds will be less obsessed with short-term profits.
”They`ve come to the realization they can`t just throw $1 trillion around. I think they`ll fulfill their long-term obligations rather than just trying to make money in the market.” That isn`t necessarily good news for equity markets because it means less turnover. But pension funds and the overall economy will continue to grow, and the stock market will have to grow to service that.
Marvin Kosters, economist at the American Enterprise Institute in Washington, D.C., said the crash ”made people have more appreciation for less volatile assets.”
One of these is housing, he said. As interest rates declined with the Federal Reserve Board`s crash-induced easing, the value of housing began to rise. And, Kosters said, that offset the loss of stock values on Wall Street. ”The Fed`s easing of interest rates helped spur the housing market until this past April, when it began to slowly increase interest rates,” Mark Obrinsky, an economist with the U.S. League of Savings Institutions.
The crash`s first anniversary does have a happy note to it, but there is underlying tension. The questions linger: Will the small investor come back?
Are current reforms sufficient to prevent another crash? And are there effects of last year`s crash that have yet to show up?