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Bottom-line message: It's not "Black Monday'

Published Oct. 2, 2005

The number looks uncomfortably familiar, but the circumstances on Wall Street are entirely different from a decade ago, the last time the Dow Jones Industrial Average fell more than 500 points in a day.

That was the message Monday from Wall Street analysts after the stock market suffered its biggest drop in years, sending the Dow down 554.26 to 7,161.15.

The decline was the Dow's largest point drop, surpassing the 508 points the stock market's best-known indicator suffered Oct. 19, 1987, which became known as "Black Monday." But this latest drop translated to 7.18 percent of the Dow's value, compared to the 22.61 percent lost a decade ago, and that's a big difference between the 1987 crash and this latest setback.

Beyond the percentages, we are in a very different market today, analysts said. The U.S. economy is stronger, interest rates are about 4 percentage points lower than a decade ago, and stock prices, while perhaps too high lately, haven't been as overvalued as they were in 1987, said Alfred E. Goldman, a vice president at A.G. Edwards & Sons, a St. Louis-based investment firm.

When the market crashed 10 years ago, there was little, if any, investor confidence in the economy. The federal budget deficit was expanding and the dollar was under attack. This time around, unemployment is low and the public is fairly confident about the economy. The budget deficit for the just-ended fiscal year was the lowest since the mid-1970s. The dollar is considered to be generally healthy.

So why did selling in Hong Kong and other Asian markets, which began spreading to the U.S. last week, rattle Wall Street so badly?

"Panic and irrational hysteria," Goldman stated.

"It provided an excuse for a correction to get started," said A.C. Moore, a stock-market analyst with Principal Financial Securities in Santa Barbara, Calif.

For the past two years, as stocks barreled higher and propelled the Dow through 5,000 and onward past 8,000, many analysts and investors thought the market was going too high too fast. Federal Reserve Chairman Alan Greenspan issued periodic warnings, the most famous of which was his declaration last December that prices were riding higher on "irrational exuberance."

But as the months have gone by, the market just hasn't found a big enough reason to stop rising _ until economic problems began to surface in Asian countries, raising the possibility that U.S. companies might not enjoy boundless earnings growth overseas.

"The market is irrational in both directions," said Brian Belski, analyst at Dain Bosworth in Minneapolis. "For a long time it was looking for any evidence to push it up. Now, the mood has gloomed and investors are looking for reasons to sell."

Still, this is not 10 years ago. The people who have driven the market to its soaring levels the past few years have been individual investors who have withstood declines and kept putting into the market. They were not in the market 10 years ago to the extent they are today. One reason why they have become investors is because they have seen the market falter and then come back.

Analysts expect the individual investors to keep buying mutual funds and contributing money to 401(k) retirement plans, as they have done several times this year during market pullbacks. It's true they may be a little more cautious, but they are not expected to abandon the market.

This begs the question, who was selling Monday? According to Goldman, "the fuzzy-cheeked supposed professional money managers who have never seen a down market and who get a score card almost daily" based on the profits they make. He described individual investors as calmer and less emotional than the pros.

The market is likely to continue to be volatile for a while. But Goldman predicted that in a few days or a week, stock prices will go back up.

"The message is going to be, "we were too low.' "