Can Stock Prices Climb Above the Peak of '87?
FOR the United States investment community, wedded to statistical score cards such as the Dow Jones industrial average, an occasional look at anniversaries can be instructive. The stock market is about to embark on a major anniversary. It was two years ago this month, on Aug. 25, 1987, that the stock market hit its closing peak: 2,722.42 points for the Dow. That climb followed a tumultuous spring and summer, with valuation levels spiraling upward in large part because of heavy net buying from abroad, according to William Helman, director of economic and investment policy with Smith Barney, Harris Upham & Co. During the first three quarters of 1987, net foreign purchases amounted to over $23 billion. That was up from $18 billion in 1986. But in no year in the previous 10 years, says Mr. Helman, had net foreign purchases exceeded $6 billion.
Just a short while later, on Oct. 19, 1987, the market party was over, for awhile at least. That day the Dow plummeted by 508 points, closing at 1,738.74. Thousands of investors left the market. In many cases, those investors are still sitting on the sidelines.
For the folks still in the market, the big question is the most obvious one: Can the market get back above the Aug. 25 high - and stay there for a while? And even if it does, should investors, looking back to 1987, be worried?
It might seem premature to suggest that such an upward course is quickly forthcoming. Economists are scanning the horizons for signs of recession. Such an occurence would hardly help propel the market to dizzying new highs this year.
Still, the market has made substantial gains since the Oct. 19, 1987 crash. Last Wednesday, the Dow closed at 2,686.08. According to Geraldine Weiss, editor of Investment Quality Trends, a newsletter published in La Jolla, Calif., the 30 stocks making up the Dow are up more than 40 percent on average.
The Standard & Poor's 500 has already broken its 1987 high, which was 336.77 at the close of the trading day on Aug. 25 of that year. During the past week, the S&P 500 was in the 345 range.
But not all markets are the same; the 1989 market, analysts such as Helman note, is quite different from the 1987 market, despite the similarity in market index numbers.
This year's market rise, Helman argues, has ``been accompanied by much skepticism.'' Back in 1987, there was a general giddiness about the escalating Dow. In addition, the market this year has lacked the heavy net foreign purchasing evident two years ago.
``In the first quarter of 1989,'' Helman writes in a Smith Barney study, ``such net purchases were reported to be about $0.4 billion. We think there was a pickup in the second quarter, but not nearly to the 1987 levels. It would seem that our overseas friends still are as wary of the perils of 1987 as are our domestic ones.''
But wary or not, optimists believe the Dow will push through the Aug. 25, 1987 high sometime in the next few months.
Michael Wilcox, a research analyst with Morgan Stanley & Co., argues that 1989 is not a repeat of 1987. Valuation levels, he says, are well below where they were in the summer of 1987. He sees stocks as ``at least 5 percent undervalued.'' In fact, he believes that valuation levels are currently more like where they were in late 1985 or early 1986.
Based just on current bond yields, Mr. Wilcox believes the Dow will ``be above 2,800 by year-end and above 3,000 by this time next year.''
Perhaps. Still, the folks who left the market after the heady days of 1987 are in effect saying that when you climb up the ladder too high too fast - whether the ladder is called a Dow or an S&P 500 - sometimes it's best to pause for awhile and make sure the rungs in front of you don't have any loose bolts or other surprises.