NEWS ANALYSIS - Many Experts Call Replay of ’87 Unlikely

While Friday’s stock market selloff fueled fears of a repeat of the crash of October, 1987, many key economic and market indicators are more positive now than then, making a sustained market downturn unlikely, many analysts contended.

Interest rates are lower than two years ago and are generally heading down, while rising rates in mid-1987 were a major force behind that year’s market selloff, they noted. The dollar has been rising and is stronger than in 1987. And several--but not all--key statistical measures show that stocks are not nearly as overpriced now as they were in the 1987 period.

“The fundamental differences are pretty clear,” said Charles I. Clough Jr., chief investment strategist for the Merrill Lynch investment firm.

“I don’t think we will see a replay of 1987, the conditions are very different,” said Al Frank, editor and publisher of The Prudent Speculator, a Santa Monica investment newsletter. He sees the Dow Jones industrial average eventually rebounding to hit 3,000 by year’s end, up from Friday’s close of 2,569.26.

Nonetheless, these and other analysts said, the differences still don’t rule out the possibility of another massive selloff next week--the result of panicky investors heading to the exits. Some say a plunge on the Dow Jones industrial average to 2,300 or even lower--nearly 270 points below Friday’s close--is not out of the question starting Monday.

Analysts note that there are enough similarities to 1987 to be unnerving to many investors.

One of the most striking similarities is the timing of the selloff on a Friday in mid-October. The 1987 crash, some observers say, actually started on Friday, Oct. 16, when the Dow fell 108. It then nosedived 508 points on Oct. 19, Black Monday.

“The decline this time, coming on a Friday, will give people a weekend to get frightened to do some dumping of stocks on Monday morning,” said Arnold Kaufman, editor of Standard & Poor’s Outlook newsletter.

Another troubling similarity is that both then and now, the collapse has been triggered by a growing perception on Wall Street that takeover activity will slow. Takeover speculation has driven stock prices as much as 10% to 20% higher than they would be otherwise, some experts say.

Analysts blamed Friday’s collapse in part on recent jitters in the market for high-yield “junk” bonds used to finance takeovers, and on Friday’s news that financing had fallen through for the proposed management buyout of United Airlines’ parent company, UAL Corp.. Similarly, in 1987, takeover stocks tumbled just before the crash on threats by Congress to curb takeovers by reducing the tax deductibility of interest on debt used to finance acquisitions.

“Acquisition activity has been the primary prompt this year, and if you eliminate the primary drive, then it’s obvious the market will drop,” Hugh Johnson, chief investment officer of the First Albany brokerage firm, told Reuters.

Another similarity is the fact that dividend yields--a ratio of stock prices to dividends paid--had fallen close to the 3% levels that normally signal a market plateau. In 1987, when the market peaked, dividend yields tumbled below 3%.

“This could well be the top of the whole bull market,” contended Robert T. Gross, editor of Professional Investor, a Pompano Beach, Fla., newsletter. Gross, who also points to weakness in the Dow Jones average for utilities stocks as another negative sign, has been bearish for months.

At least one key factor is worse now than two years ago. Corporate profits now are beginning to weaken, whereas in 1987 they were strongly rising.

“Without higher earnings there is no way to defend these stock prices,” said Charles Rother, editor of ASC Mutual Fund Advisor, a newsletter in Los Alamitos. He predicted that the Dow would tumble as much as 600 to 700 points eventually from its peak earlier this month, settling at between 2,000 and 2,300.

Perhaps the biggest and most important similarity is the fact that the market had performed remarkably well this year until now, just as in the first part of 1987. As of Monday, the market, as measured by Standard & Poor’s 500-stock index, had risen nearly 30% so far this year, similar to the rise in 1987 before the market peaked in August of that year.

“The market had not had a correction in some time, and one was certainly overdue,” said Kaufman of Standard & Poor’s.

But Kaufman and many other analysts contend that a correction this time will be sharp and quick, not sustained, because fundamental differences between now and 1987 outweigh the similarities.

“This one will come quickly and will disappear quickly,” said Peter Anderson, president of IDS Advisory Group, a Minneapolis investment management concern.

Perhaps the biggest and most important difference is interest rates. Rising interest rates generally are bad for stocks. But although they rose slightly during the late summer, rates generally have been falling since March and are much lower than they were in mid-1987.

By contrast, in mid-1987, rates were rising sharply to the point where the widely watched 30-year Treasury bond was yielding close to 10.5% just before the crash. But lately that bond has been yielding just above 8%, and fell to 7.88% Friday.

Another important difference is the strength of the dollar. A rising dollar is generally good for stocks, by boosting the value of U.S. assets and thus attracting foreign buyers. Lately, the dollar has been climbing, defying Western central bank intervention to try to drive it lower. By contrast, in the summer of 1987, the greenback was at lower levels and was generally falling.

Many analysts also contend that stocks are not as overvalued as they were two years ago, as measured by price-earnings ratios, which measure the relation of stock prices to corporate earnings. A ratio of 20 or higher has in the past signaled that a market top was near. But the price-earnings ratio for stocks in the S&P 500 has recently hovered just under 14, compared to more than 20 in 1987.

Also, experts say, the Federal Reserve and the New York Stock Exchange are prepared to avoid a meltdown. Thanks to “circuit breaker” measures instituted last year in response to the crash, the NYSE will automatically halt trading if the Dow plunges 250 points from the previous day’s close. That presumably would give the Fed time to reassure markets by pumping new supplies of cash into the nation’s financial system, lowering interest rates and easing any cash squeeze on banks, brokerages and investors.

Similar action by Fed Chairman Alan Greenspan on “Terrible Tuesday”--the day following the Black Monday 508-point collapse in 1987--laid the groundwork for a market recovery, most experts agree.

Analysts also say that even though takeover-related stocks will be hurt, that is not enough to keep the market down for long.

“Is what we are really seeing an end to the takeover boom? That is the real question,” Merrill Lynch’s Clough said. “This is not a bear market. The market will eventually right itself.”