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Neal St. Anthony: A market rout, but also a good time to buy
Market downturns typically correct fundamentals that have gotten out of whack. And they're a good time to buy.
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Judy Halabrin was a cub broker at Morgan Stanley's St. Paul office back in 1987, when the stock market cascaded downward on that bleak Monday. Fighting her own trepidation, she tried telling clients not to panic and not to sell good companies at bargain basement prices as the Dow Jones industrial average tumbled more than 22 percent and the Standard & Poor's 500 fell some 20 percent.
Finally, Halabrin got a reassuring call.
"One of my best clients, the owner of an architectural engineering firm called and said, 'Judy, there are good companies on sale,'" said Halabrin, now a Morgan Stanley senior vice president of investments. They started buying.
A lot of otherwise bright people, professionals and amateurs, lost their nerve and sold out during that market.
"I would say there were some shocked brokers," recalled Steve Berghs, the since-retired manager of Piper Jaffray's flagship downtown Minneapolis office. "I just remember a line that lasted around here for years.
"A broker would turn away from the telephone and say, 'I gotta sell some of this.' And somebody else would look up and say, 'To whom? To whom?'"
Yet, if you did nothing, or kept reinvesting over the last 20 years, you almost certainly have made some real money.
For example, if you had $50,000 invested in an S&P 500 index fund on Oct. 1, 1987, your investment would be worth about $500,400 today, a tenfold gain, said Jacob Wokowitz, an investment analyst at Accredited Investors in Edina.
Alexa Auerbach at Morningstar/Ibbotson, the fund analyst and research firm in Chicago, computed last week that $300 a month invested in the S&P 500, starting on Oct. 1, 1987, would be worth about $238,500 last week.
The market is fundamentally driven by the projected earnings of the companies whose stocks are traded on the nation's exchanges. Pete Anderson, who in 1987 was chief investment officer at what was IDS Financial, had warned since September that the frothy market, trading at about 22 times expected 1988 earnings, was too pricey.
"But nobody wants to be the first out in a good market," recalled Joe Barsky, then a stock analyst and portfolio manager working for Anderson at what is now Ameriprise Financial. "And history will show that most equity portfolio managers were lemmings. We had followed each other over the cliff."
On Tuesday morning just after dawn, Anderson called the equity analysts and portfolio managers together. "Pete, bless his heart, just said, 'We gotta buy ... start buying good stocks,'" said Barsky, who left the business after 25 years to work with student investors at the Carlson School of Management at the University of Minnesota.
The market turned north that day.
In little more than a year, the S&P 500 and Dow Jones industrials had recovered their lost ground.
In early 2000, the major indexes were trading at even-higher multiples, up to 30 times projected 12-month earnings for the S&P 500.
What followed was a steeper decline than 1987, accomplished over more than 30 months.
The stock market has put in "curbs" since the crash that are designed to limit the extent of a one-day sell-off and permit cooling-off periods.
"But if the market wants to go down it will go down, regardless," Barsky said. "The decline of 2000 through 2002 was far more powerful than 1987."
Despite the market's current highs -- both the Dow and S&P continue to hit new records -- today's market sells for less of a premium than it did in October 1987. The S&P 500 trades at about 15 times projected 2008 earnings, which is about average for the last 25 years.
That doesn't mean it might not drop abruptly. Some analysts think deteriorating consumer sentiment and slower earnings should dictate up to a 10 percent correction.
It could happen again sometime, despite regulatory mechanisms to limit one-day declines, bigger, global markets and a Federal Reserve that has shown itself willing to pump money into the financial system rather than risk a meltdown.
At its extremes, the stock market is driven by greed and fear rather than fundamentals. That was showcased in October 1987.
Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com
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