Strong Economy, Global Forces Help Lessen Chance Of Repeat

Spokane brokers and investment advisers who remember the 1987 crash differ when asked if the stock market has learned its lesson.

For one thing, they note, many of those in financial services today were not yet in the business when the Dow Jones industrial average suddenly dropped 500 points.

Ken Roberts, who heads his own investment service, said he’s not sure how the current generation of mutual fund managers and brokers will react if the market’s volatility strays beyond their comfort zone.

He likened some to 800-pound gorillas on a three-hour coffee jag. One slip could trigger a dangerous response.

Even strong companies are unaccountably taken to the woodshed, Roberts said.

But he added that today’s market is underpinned by a stronger economy and global forces that move quickly to discipline markets and governments that are acting irresponsibly.

Roberts predicted annual stock market yields will return to the historic norm of just below 10 percent, compared with the 20 percent and 30 percent gains of the last few years.

As a money manager, he said his biggest problem is finding stocks he thinks are priced reasonably.

At D.A. Davidson, adviser Gary Shea said that even those who experienced the ‘87 crash didn’t come away with a serious hangover.

The market recouped its losses in seven months, and hasn’t looked back.

“Current investors are operating on the assumption that bear markets last months, not years,” Shea said.

Those who lived through the 1970s and the post-oil embargo slump know better, he said.

But Shea predicts the “brutal efficiency” of the U.S. economy is likely to keep stocks bubbly for years to come.

No other nation, he said, is willing to let whole industries die if markets determine they no longer make economic sense.

The social impacts may be harsh initially, but redistributing resources has enabled U.S. firms to recover the leadership in such fields as high technology, Shea said.

In his own industry, he added, firms can handle three or four times the volume of trading with 30 percent fewer people processing the orders. If necessary, they could push capacity still further, he said.

Shea said he thinks the financial system as a whole could digest another Black Monday without the tremendous confusion that pushed markets close to panic.

But the next upheaval could dwarf that, he said. “There is so much more money in these markets now.”

Shea, like Roberts, said he has more faith in individual investors than professional money managers.

Individuals understand volatility and believe a shaky market will stabilize, he said, adding that many greenhorn brokers don’t have that perspective.

Bob Nelson was president of the now-defunct Spokane Stock Exchange in 1987.

Trading in the Peyton Building was relatively calm on Black Monday, he said, because some regarded the exchange’s precious metals stocks as a refuge from the storm.

But the inability to reach brokers elsewhere to do business was unnerving.

“You couldn’t get a lot of traders to answer the phone,” recalled Nelson, who said markets could again break down if trades cannot be executed because brokers freeze.

He said the ‘87 market was built on junk bond deals and hype instead of fundamental economics.

Nelson attributed the Spokane Exchange’s demise in part to regulatory changes made in the wake of Black Monday.

Requirements that dealers have more reserves and stand behind the stocks they marketed discouraged some who were on the edge, he said.

The local exchange tried to respond to signals that it grow or fade away, but it did not have the resources, he said.

Nelson and Roberts are concerned investors have become used to returns the market will be unable to sustain going forward.

Mutual fund charts dampened by Black Monday will soon reflect 10-year percentage returns in the mid- to high-teens that investors believe can be achieved without risk, Nelson said.

Those expectations, he said, are scary.

“People are very deceived by a good market,” Roberts said. “We keep telling our clients the returns you’ve been seeing over the last few years won’t continue.”

, DataTimes ILLUSTRATION: 2 Graphics: 401(k) plans soar; Growth in mutual funds