Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Mon, Oct 19 1992 Date: Mon, 19 Oct 92 04:38:13 EDT Message-ID: 10-19 0000 BONUS: Anniversary shows market change USA TODAY Update Oct. 19, 1992 Source: USA TODAY:Gannett National Information Network Monday marks the fifth anniversary of the 1987 stock market crash. But don't let that make you nervous. In less than seven hours on this day and this date five years ago, the Dow Jones industrial average plunged 508 points, or 23%, wiping out $503 billion in stock value. A mass exodus overwhelmed the New York Stock Exchange computers, and an astounding 604 million shares were traded. As if to remind everyone of that day, the Dow plunged more than 100 points in two hours just two weeks ago before later recovering most of that drop. WHAT EFFECT SHOULD THIS HAVE? Investors should be nervous. But not because another crash is about to wipe out their investments. While another crash is possible, it's unlikely for a number of reasons, experts say. Instead, investors should be nervous because they've got years of hard work ahead of them. Stocks won't be as much fun to play as they were in the '80s, when they gained an average 17.5% a year, including dividends. The long-term average gain for stocks is less than 11%. So far, the '90s are bumping along toward that average. IS ALL THE NEWS BAD? Still, it's better to sweat out that kind of return in stocks than to settle for the yields paid on bank certificates of deposit or money-market funds. For anyone who was an investor during the crash, 60 months have soothed the pain. At 3174 Friday, the Dow is 1435 points, or 83%, above its crash-day close of 1739. SO WHAT IS THE CURRENT PROBLEM? The problem is that many stocks may have bounced back more than they deserve. The Dow and other market averages are near record highs at a time when the U.S. economy is still struggling, corporate earnings are disappointing and world financial markets have been shaken. Stocks of companies in the Standard & Poor's 500 index now are selling for 24 times what those companies earned per share the past 12 months. By that measure, stocks are even more expensive than before the 1987 crash, when S&P 500 stocks sold for 23 times earnings. IS THERE FEAR OF ANOTHER CRASH? But stock market experts say the crash won't repeat - at least not soon. "There might be some cascading" in the stock market, says Treasury Secretary Nicholas Brady, who headed a commission that investigated the crash. "But there won't be an avalanche at any time." WHY IS ANOTHER CRASH UNLIKELY? Brady is among many who say things are different on Wall Street. There have been changes that make another '87-type crash unlikely. Rules now limit computerized program trading, slowing market drops. The New York Stock Exchange stops all trading for an hour if the Dow plunges or soars 250 points and two more hours if the Dow falls or gains another 150 points. WHAT OTHER CHANGES HAVE BEEN MADE? Professional investors have abandoned some of the trading practices blamed for the severity of the crash. Individual investors who went through the crash are less likely to lose their head and dump stocks because they know a decline may be temporary. "Apprehension and fear are the things that cause panics," says Brady. ARE THERE SETBACKS TO THE NEW CAUTION? While the risk of a crash is much less than in '87, so are chances for big, fast rewards. "The '80s were one of the single best decades this century for stocks," says Peter Lynch, former chief of Fidelity's super successful Magellan mutual fund. He notes that the Dow more than tripled, rising from 839 to 2753 from the start of the decade to the end. "It's hard to imagine we'll have another decade with a tripling in the Dow." HOW WILL MONEY BE EARNED ON THE MARKET NOW? At the 17.5% annual return stocks earned in the '80s, it takes just more than four years to double your money. Those who didn't want to face the risks of the stock market in the '80s could hide their money in banks and still easily beat inflation. Before the crash in 1987, money-market mutual funds paid 6% a year and five-year bank CDs paid 8%. Now, money funds pay less than 3% and five-year CDs slightly more than 5%. In many parts of the country, people made fortunes in real estate in the '80s. But risks in that market can be high. Ask anyone who bought a house late in the decade in Boston or New York, or in Los Angeles or San Francisco. WHAT IS THE PROSPECT FOR THE FUTURE? Analysts say the rest of the '90s will probably be less exciting for stock investors but a little easier on the nerves. "The '90s will be more normal," says Stephen Leeb, editor of Personal Finance newsletter. Normal isn't all that bad. At the historical gain for stocks of just less than 11% a year, it takes only seven years to double your money. WILL IT BE DIFFICULT? There will be bumps and bruises. But it should pay to stick to stocks. Leeb says the election will mark the start of economic improvements that will help stocks. If Bill Clinton wins, all the better, he says. "Once a new man is in there, people are going to feel better," Leeb says. "That will give the economy a little boost, and a little boost is all we need." WHAT PARTS OF THE MARKET WILL BE STRONGEST IN THE 90S? Leeb argues that a continuing slowdown in consumer spending will undermine stocks of retailers and consumer-products companies. He likes builders of roads and bridges and environmental waste-cleanup companies - though most of those stocks have done little since pros fell in love with them three years ago. At the start of the decade, analysts also loved health-care stocks. Those stocks did great for a while. Now, cutting health-care costs has taken over as an investment trend. Stocks of firms that manage corporate health- care plans and find cheaper ways to perform surgery are big now. WHAT OTHER DIFFERENCES WILL THERE BE? During the '80s, professional investors dominated trading. They used techniques that favored stocks that have a large market value, stock price times number of a company's shares. They increased market volatility by trading huge quantities of those stocks by computer. Now look for individual investors to gain importance in the market, often indirectly through mutual funds. WHAT DOES THIS MEAN TO THE MARKET? The fact that individual investors are going to be a greater force, even through mutual funds, is good for the market, says Jack Bogle, chairman of mutual-fund giant Vanguard Group. It might even help prevent another crash. Bogle says many individual investors who got burned trying to play short-term stock fads before the crash have learned their lesson. If they can hold steady through bouts of market volatility, so can fund managers. He believes individuals indeed have that healthier attitude toward stocks. "They have a greater willingness to look at it as a long- term investment rather than a short-term gamble." Bonus Editor: Kate Coughlin. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. 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