Two years after the big crash, Wall Street is bravely facing another fearsome Monday with major Western governments working overtime to prevent it from happening again.
World financial leaders conferred anxiously over the weekend and preached calm over Friday`s 190-point plunge on the New York Stock Exchange. The Federal Reserve Board said it was ready to flood the economy with cash. Stock exchanges, traders, regulators and businesses plotted protective trading strategies.
The Securities and Exchange Commission checked with large mutual funds to see how many customers had redeemed their shares. These funds would have to sell stocks to raise cash for redemptions. But the industry said Sunday redemptions have so far been light, good news for the market.
Never has the world been better prepared for a stock market crash, an event normally considered highly unpredictable. Yet the preparation alone may prevent the worst from happening. Black Monday, Oct. 19, 1987, taught the markets many lessons about financial crisis management that they now are applying.
”It`s important that this time we know the market can take a setback like this and come back,” said a banker attending the American Bankers Association convention in Washington. ”In 1987, we didn`t know that.”
One thing the people who run the markets learned two years ago is that the world`s stock exchanges are closely linked, so that what happens in Tokyo and London usually carry on to New York in wavelike fashion.
In Tokyo Monday afternoon, the Nikkei Stock Average was down to 34,599, a drop of 517 points from Friday. The decline, about 1.5 percent, cheered Japanese officials because the market had opened more than 600 points lower.
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But the key is the American investor-individuals and institutions. No matter how calming the assurances, the professionals aren`t totally sure how they will react to the dynamics of today`s markets.
Have they been so spooked by the 190-point drop in the Dow Jones industrial average on Friday the 13th that they will sell everything in sight on Monday? Or will they heed the words of professionals who say the fall was a necessary correction related entirely to the fact that takeover stocks were overvalued?
Some brokerage firms reported getting thousands of sell orders over the weekend, indicating that the market in New York may head down at the opening before it gets a chance to recover. But for all those rushing in to unload stocks, many others are counseling that stocks may be approaching the cheap side.
Indeed, one powerful source of buying could be corporations themselves. In 1987, when the market was at its lowest, many firms bought back their own stock-by then sharply reduced in value-to help turn prices around. Another powerful source of buying could be foreign investors, particularly the Japanese.
While many are downplaying Friday`s stock plunge, more is at stake now than two years ago. The economy is weaker and there are more predictions that there could be a recession next year. A sharp market downturn could take some zip from consumer spending.
Though the Federal Reserve Board is likely to lower interest rates, other central banks in world capitals such as Tokyo, Bonn and London are less eager to pump cash into their financial systems as they did two years ago to prevent a worldwide depression. They only recently raised interest rates to cool down rising prices.
Among some pessimists, the view persists that Wall Street, and the nation, did not learn any real lesson from the `87 crash. They note the market reached new highs because of debt-driven takeovers, and Wall Street suffered little pain.
”One of the worst things that ever happened was that we had a stock market crash and there were no consequences,” said a prominent Chicago investment banker who requested anonymity.
Prior to the market`s opening on Monday, relative calm prevailed in Tokyo and in European capitals. Analysts said the takeover boom is not a real problem in those countries. In London, brokers predicted share prices would open 50 to 100 points down Monday.
Ira Kaufman, chairman of Rodman & Renshaw Inc., a Chicago investment firm, predicted the market in New York will open lower. ”This is something we`ve been heading for with all this takeover activity in the market,” he said. ”UAL was just an excuse.”
The market fell Friday when UAL Corp., parent of United Airlines, said it had been unable to arrange financing for a management buyout. This called into question all so-called ”takeover” stocks, but the decline hit other stocks, too.
Friday`s plunge likely will presage a severe cooling of takeover financing. ”Bankers are scrutinizing these LBOs (leveraged buyouts) more than they used to,” said Richard Durkes, senior vice president at the investment firm Chicago Corp.
Wall Street investment firms have reoriented more of their business to mergers and acquisitions. But with corporate profits also soft, the concern being raised Sunday was where the market would find its next source of strength.
Where the market goes also is critical to Chicago`s futures markets, especially the Chicago Mercantile Exchange, which trades a futures contract called the Standard and Poor`s 500 Index. Institutional traders use computer program trading to profit from the difference in the futures contract and the actual stocks making up the index in New York. Some critics blamed program trading for the 1987 crash, but official studies generally exonerated the Chicago markets.
Nevertheless, the Merc is prepared for the worst. A sharp plunge could test one of the reforms put in place after the crash-so-called ”circuit breakers” that would halt trading.
The megacircuit breaker, though, will take place if the Dow Jones industrial average falls 250 points. Then all trading, in New York and Chicago, would stop for an hour. Supporters believe this will spread calm, but critics say it would just build up a dam of sell orders that would then send the market lower.