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CBS Sounds Stock-Market Crash Alarm

     CBS “Evening News” has a strange way of commemorating unpleasant historical events.

 

     The October 14 broadcast observed the 20th anniversary of the Oct. 19, 1987, stock market-crash by comparing today’s economic climate with that one. Funny thing, CBS reported “Black Monday’s” initial 22.6 percent plunge in the Dow Jones Industrial Average, but skipped the bull run that led to the 25 percent gain by the end of 1988.

 

     “[T]he avalanche [Oct. 19, 1987, stock-market crash] was made worse by computer program trading, but the things that triggered it were overvalued stocks, a weak dollar, a period of extreme market volatility and a summer of worrying economic news,” CBS correspondent Alexis Christoforous said. “Sound familiar? Some market strategists are warning investors now to strap in.”

 

     However, the comparisons of stock values from October 1987 to October 2007 aren’t accurate according to the October 15 Wall Street Journal.

 

     “Stocks don't look as overpriced today as they did in 1987,” E.S. Browning wrote. “Today, the companies in the Standard & Poor's 500-stock index trade only a little above the historical average of 16 times profits for the past 12 months. In 1987, the S&P 500 was at more than 20 times profits.”

 

     Also, as an article by Andrew Bary in the October 15 Barron’s pointed out, the perception of the Federal Reserve’s role is different now. “One reason the monster declines are less likely now is that investors recognize something that they didn't in 1987: The Federal Reserve is on their side.”

 

     Bary was referring to the Fed’s injecting liquidity into the monetary system and the cutting of short-term interest rates earlier this summer when the markets were struggling.

 

     Christoforous did point out the market’s circuit breakers would prevent a drop as severe as the 1987 crash in a single day. If the market drops 10 percent early in the session, trading is halted for one hour. If the market drops 20 percent late in the session or 30 percent at any point, trading is halted for the day.

 

     However, Christoforous still said such an event like the “Black Monday” crash could reoccur.

 

     “Can it happen again? It could,” Christoforous said.