Strange things happen to market in October

October 05, 1997


Staff Writer

It's October and the stock market is booming.

Such was the case a decade ago, when the market was enjoying a meteoric rise. Then came the crash of '87, which saw the Dow Jones industrial average - a key index of major corporation stock prices - drop an alarming 22 percent in just two days of trading.

The crash sent a message to investors, particularly young people who never saw a major market downturn before, that stock prices do not soar upwards forever, said John R. Hershey III, branch manager for the Hagerstown office of the investment firm of Ferris, Baker Watts Inc.

"It was a wake-up call that the market can have steep corrections at some point," he said.

It is a lesson Hershey and other investment professionals are remembering now, with the Dow reaching record heights and a belief among many industry observers that a bloated market is being fueled by many overpriced stocks.


That's what prompted the '87 crash, said Richard Cripps, market strategist for Legg Mason Wood Walker Inc. in Baltimore. The price of stock compared to earnings was about 22 to 1, which was very high, he said.

"The market never should have been as high as it was," Cripps said.

The price-to-earnings ratio is about the same today, but it is buffered by lower interest rates and lower inflation, which enhance the value of stock investing, he said. And even if there is a correction and prices fall, he feels it could prompt even more stock purchases.

"My guess is people would see it as a bargain and would want to buy," Cripps said.

That's what happened last spring, when a brief decline prompted buying that sent the market to then-record highs.

But given the uncertain nature of the stock market, it is impossible to rule out another sharp downturn, industry observers said.

"The market goes up, the market goes down. I don't think sell-offs in the market are finished," said Ray Johns, an economics professor at Hagerstown Junior College.

Hershey believes a correction could come, but nothing of the magnitude of `87.

"I don't feel the euphoria, the excess we had 10 years ago," he said.

Hershey remembered being on vacation in Mexico during the '87 crash, away from newspapers or a television that would have reported the crisis. He called home to Hagerstown one day and his father told him the Dow had dropped five points.

That didn't sound so bad, but Hershey misunderstood his father, who had actually said the Dow dropped 500 points, and was "shocked" when he returned home and found out the truth. But his short-term concern was tempered by a broader view of investing.

"We told people to hold tight and remain firm. You buy stock as a long-term investment. You really shouldn't be scared by a turbulent market," Hershey said.

But the sell-off was on, as many people quickly sought to cut their losses and leave the market with what they could, Johns said.

"They should have just accepted the market has these little adjustments to it and held on," he said.

That is proven when the 1987 crash is considered with the overall growth of the market in the past 15 years, Hershey said.

In August of 1982, the Dow average was at 777 points. On Oct. 15, 1987, the day before the crash began, the Dow had reached 2,355 points. By Black Monday, Oct. 19, 1987, it had plummeted to 1,738.

But by last week the Dow had peaked above 8,000 for the second time this year.

"Nineteen eight-seven now looks like a very small blip in the screen," Hershey said.

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