The restless nights began soon after Oct. 19, 1987—Black Monday, the largest one-day stock market crash in history. In the two weeks following the crash, Robert Ketchin, 41, invested heavily in the stock market in the hope that it would rebound quickly. But over the next year, he watched as 40 per cent of the value of his $80,000 portfolio evaporated. Finally, last November, with many economists predicting an imminent North American recession, the jittery Toronto beer industry executive decided it was time to sell off all of his stock holdings. But three months ago, Ketchin changed his mind again and invested $30,000 in a variety of shares in blue-chip Canadian companies. Said Ketchin: “Generally, I feel much more positive.
The more that the market goes up, the better I sleep.”
In fact, North America’s apparently irrepressible stock market rally has caught even the experts by surprise.
Most analysts predicted a major downturn after the crash—a long period of stagnant markets and a punishing economic recession. Instead, the unlikely happened. Last week, the bench-mark Dow Jones Industrial Average reached a postcrash high of 2,637, which means that it is up by 22 per cent so far this year and is closing in on its August, 1987, record of 2,722. Reports were equally favorable on the Toronto Stock Exchange, where the 300 Composite Index surged to 3,967— another postcrash record. Retail sales and corporate profits also remained strong after the crash. But even as the stock market continues its upward climb, other signals are now indicating that an economic slowdown—including the possibility of a severe recession— is still a possibility. Said Toronto analyst Ian McAvity, author of the influential stock market newsletter Deliberations : “How can people be so complacent? I am scared stiff.”
But, at least for now, stock prices continue to confound the pessimists. Takeover activity in both Canada and the United States has stirred up some of the action. At the same time, hungry professional investors and pension-fund managers now predict that the U.S. Federal Reserve Board this year will attain its goal of a so-called soft landing—slower economic growth with lower inflation and interest
rates—instead of a sharp economic downturn.
The outlook is less clear in Canada where Bank of Canada Gov. John Crow has kept interest rates higher than in the United States. Crow has repeatedly stated his determination to keep inflation under control. Even so, Canadian stock markets have received welcome support from foreign investors—the same
ones who mainly vanished after the crash. Last week, Statistics Canada reported that nonresidents—who reduced their Canadian stock market holdings by $2.7 billion last year—have increased their investments in Canadian stocks by $800 million during the first five months of 1989. And analysts say that a lot of cash is originating in Hong Kong, where investors continue to flee from the turmoil in China.
Bullish investors say that although stock prices are flirting with the dizzying peaks of August, 1987, they are not nearly as overpriced as they were two years ago.
By 1987, prices for Canadian stocks had climbed to an average of 21 times the value of their earnings per share—a company’s annual profits divided by the number of its outstanding shares. According to Charles Bradley, Toronto-based vice-president for the securities firm Lévesque Beaubien Geoffrion
Inc., the historical norm for the Toronto and New York City exchanges is about 14. Analysts said that, in the summer of 1987, stocks were highly overvalued—and the crash proved them right. But now, many of those same analysts say that even with the startling rally, stock prices are still relatively low, compared to robust company profits. The price-earnings ratio on the Toronto Exchange now is a modest 11.9. On the Dow it is 11.2.
Still, the rally would stop temporarily, at least, if the predicted economic soft landing became a severe recession. Some indications of a slowdown are already apparent. The United States commerce department reported last week that consumer spending grew by only 1.1 per cent in the second quarter of 1989, down
from two per cent in the first quarter. Consumer demand causes two-thirds of the production of goods and services in the economy.
There are also some warning signs in Canada. The Retail Board predicts that inflation-adjusted retail sales will likely grow by only
2.5 per cent in 1989, compared with four to five per cent in recent years. House sales in Canada plummeted by 12.7 per cent in June from a year ago. Car sales across the country have slumped by
6.5 per cent for the first six months of 1989 from a year earlier.
But with stock prices apparently on the verge of setting even higher records, it is unlikely that a few indicators of a downturn will be enough to discourage investors in the short term.
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