When Nesbitt Thomson Deacon Inc. stockbroker David Doritty arrived at his office on Oct. 20, the telephone was ringing. On the previous day major stock exchanges around the world had suffered a major collapse. Wall Street’s leading Dow Jones industrial average had fallen by 22.6 per cent on Oct. 19—nearly twice the 12.8-per-cent drop of the worst day of the 1929 crash. And Doritty’s nervous clients who phoned—about 200 on that climactic daywanted to know how much they had lost. Doritty told them and, like most other brokers, tried to reassure them. Six months after Black Monday, Doritty is still cautious, and when his clients call he tells them,
“This is nothing more than a bear rally that could last three to six months.” And last week his caution was justified when the markets were shaken again.
The bellwether New York Dow Jones index plummeted by 101 points—4.82 per cent— in a single day. By comparison, the Toronto Stock Exchange composite index, buoyed by strong gold-based stocks, dropped by only 1.58 per cent.
Markets in the United States, Canada, Britain and Japan fell when the U.S. trade deficit figures for February came in at $16.5 billion, up from $15.4 billion in January. That pushed the value of the U.S. dollar down, and bond prices quickly followed as interest rates jumped. Rising interest rates contributed to the rout as investors worried that the higher rates would slow economic growth. As the deep problems in the world economy were laid bare, an eerie sense of familiarity washed over Wall Street. But the following day the markets levelled off, the Dow finished the week slightly up at 2,013.93 and the TSE closed at 3,350.31, down 30.71 for the week. Said Toronto economist Carl Bei-
gie: “The market was bid up because people thought that the [deficit] problems were on their way to a solution. But we will be contending with them until the end of the century.”
On the surface, October’s crash has still caused few perceptible setbacks. In fact, the most remarkable thing about the first three months of 1988 is that, outside of the brokerage indus-
try, it is hard to find any trace of the October disaster in the nation’s leading economic indicators. The unemployment rate is at a seven-year low, new car sales jumped by 13 per cent last month to 336,283 units, and many economists, who in January forecast that the gross national product would not grow by more than three per cent in 1988, have revised their predictions upward to SV2 to four per cent. Polls also show a high level of consumer optimism. As a result, some analysts say that last week’s share-price collapse was not justified. Said Robert Boaz, chief economist at the Toronto-based brokerage firm Midland Doherty Ltd.: “When the market drops 100 points in response to a single number, that
has to be a tremendous overreaction.”
Still, the sudden drop of the Dow and the value of the U.S. dollar underscored another far more pessimistic scenario. Many stock market analysts, drawing parallels to the 1929 crash, say that their colleagues are reading too much into employment and consumer-spending statistics. They note that employment usually increases in the opening months of a major recession, and that much of the economic growth in the last quarter of 1987 flowed from the buildup of inventories and not from consumer spending. They predict that a severe recession will occur in late 1989 or early 1990 and that when it comes it will be aggravated by high consumer, corporate and government debt. Said Irwin Kellner, chief economist at New York City-based Manufacturers Hanover Corp.: “My money is in the bank. The stock market could easily fall below its October low.”
Still, heading into last week’s collapse, many major stock exchange indexes had been rebounding. Last week the Tokyo Stock Exchange’s Nikkei Dow 225 index reached an all-time high of
27,111.35 before falling back to 26,893.57. Before the April 14 crash the Dow Jones
had regained about 360 of the 508
points lost on Black Monday, and the TSE had climbed by about 10
per cent since its 14-per-cent drop on Oct. 19.
But even the optimists’ predictions are tinged with caution. Richard Lipsey, an economist with the Torontobased C.D. Howe Institute, says he believes that the markets could begin a sustained fall again if foreign investors and central banks, particularly the Japanese, suddenly lose faith in the U.S. economy and decide that it is too risky
to continue to finance the U.S. trade and budget deficits. Lipsey said that foreign investors, who now underwrite about $120 billion of that $182-billion deficit, will likely hold their positions until after the presidential election this fall. If the incoming administration is not serious about reducing the deficits, Lipsey said that there “will be a flight of capital from the United States.”
The tremor that hit Wall Street last week clearly provides support for that view. It was a reminder that all was not well with the U.S. economy, and that the U.S. dollar might have to fall much lower to correct that country’s trade deficit. Indeed, as the markets
crashed, finance ministers from the G7 countries—the world’s leading industrial nations—were meeting in Washington with officials of the International Monetary Fund and the World Bank. During market gains before last week’s drop, Wall Street had reacted positively to optimistic economic forecasts offered by the G7 ministers. But when the negative trade figures hit the markets, they were a clear indication that the world economy is fragile. Said Canadian Finance Minister Michael Wilson:
“Let’s not be spooked by one month. We’ve had one month that was disappointing after four months that were pretty good.”
The long-term health of the Canadian economy is also clouded by the heavy debt load that Canadian consumers and corporations carry. Together, both groups owed $502 billion at the end of 1987, compared to $361 billion in 1984. If consumers and corporations suddenly cut spending to finance debt, a severe recession would be inevitable. But Black Monday and subsequent market drops have had little impact on free-spending consumers who continue to pile up debt. Said Beigie: “Central
Canadians are spending money like there is no tomorrow.”
The markets’ rebound—until last week—has also been deceiving because it was not widely supported by small investors. Both the sale of popular share-based mutual funds and trading volumes on some exchanges are still running below precrash levels. The TSE is now trading at about 70 per cent of its 1987 volumes. Although trading activity on the New York exchange has climbed to within 10 per cent of its pre-
October level, much of that activity has been generated by a round of takeover activity as corporations purchased massive amounts of devalued shares in rival companies.
The one main sector of the Canadian economy that suffered from the Oct. 19 crash is the brokerage industry itself. Eleven Canadian brokerage houses posted net losses for 1987. Among the hardest hit was Toronto-based Walwyn Inc. It lost $4.2 million for the three months ending Dec. 31, 1987, and $255,000 for the year, compared to earnings of $5 million in fiscal 1986. In New York City, Merrill Lynch & Co. Inc. reported a fourth-quarter 1987 profit decline of 98 per cent from the year earlier. And this week it reported a 37-per-cent drop for the first quarter of 1988. Sales and commissions in the sector are also depressed. One major Torontobased investment dealer said that its commission earnings are half of what they were a year ago. Doritty says that he had about 350 accounts on Oct. 19, but last week only about 25 per cent of them were active, compared to about 80 per cent before the crash.
Still, despite the uncertainty of last week, there are still many bulls on the trading floors. Leon Tuey, a former director with Dominion Securities, says that the new market surge began on Dec. 4 after the New York Stock Exchange had hit new lows. Shares in only 280 companies hit bottom on that day, compared to 1,174 on Oct. 19. And Suresh Bhirud, chief investment strategist with Oppenheimer & Co. of New York City, said that the market will continue its upward swing that began in 1982. But such optimism is rare on the trading floors, where Doritty says that many brokers are betting that the bear market will continue. In fact, the imbalances of last October still exist, and last week’s sudden crash was a blunt reminder that major economic problems remain.
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