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A Twig Cracked On Wall Street

March 31, 1987

NEW YORK (AP) _ Do you remember your first night out in the woods, when you were frightened stiff but didn’t want to reveal it to the other scouts any more than they wanted you to know they weren’t courageous?

It happened to Wall Street on Monday. A twig snapped, and it sounded like a bomb, and many of the portfolio managers ran because the other guy did, leaving bravado and bullish forecasts scattered behind.

The cracking twig was the news of a further decline of the dollar’s value in relation to the Japanese yen, and the possibility of White House trade sanctions against Japanese imports. And a weekend to reflect on them.

Among the reflections: The Japanese might pull their money out of the market; a trade war could ensue; inflation will redevelop because, in part, Japanese imports would cost more.

In the first 40 minutes of trading about 80 points vanished from the Dow Jones industrial average, a rate of descent that justified usage of the term ″panic,″ a word all but ostracized from the vocabulary since 1929.

A reaction of such magnitude hardly could have come from a randomness of investors. More likely, it developed in a concentration of like thinkers - institutional portfolio managers afraid to get caught alone in the woods.

For many weeks they had been pushing the price of stocks into a no-man’s land, a land that could mean opportunity and profits but which also was one filled with that of the unknown. Seldom had the popular averages been out there.

Several conservative analysts of the marketplace have pointed out that few charts existed for this new territory. The traditional price-value multiples were exceeded. And when that happens, so-called corrections can be expected.

Wright Investor’s Service points out that since 1929, there has been only one greater market advance, that of 1949-1956, which was uninterrupted by a correction of at least 15 percent.

Some of those indexes suggested a correction.

The price-earnings ratio of the Standard & Poor’s 500 stock index reached near 20, the highest for any market peak back to 1961. Measured by price-to- equity, the same index was more than 2.3, highest for any peak since 1937.

The market’s nerves were taut and waiting for a twig to snap. And the reaction to news of any sort is made all the more pronounced by a tendency for investment funds to be concentrated.

Twenty years ago, for example, households owned 79 percent of corporate equities directly rather than through an intermediary. Ten years ago that percentage was down to 67. Last year, ownership fell to 63 percent.

Wright’s research suggests that much of that decline results from the growth of mutual funds, whose purchases of corporate equities last year totaled a record-high of $20 billion, almost double the level of just one year before.

Life insurance companies, owners of $89.1 billion of equities at the end of 1986, fire and casualty insurers, which owned $68.4 billion, and state-local government retirement funds, which held $180.3 billion, also were buyers.

Private pension funds owned another big chunk of the market, $437.4 billion, but they were net sellers in 1986, a situation that, unlike the decline in individual or household participation, might have been temporary.

Whatever, the figures suggest a market becoming more institutionalized, and one of less individual involvement. And as a result of the concentration, the market could be losing much its randomness of thinking, or resiliency.

It is one thing for individuals with limited buying power to lose their nerve. It is another matter when like-thinking institutions or any concentration of power, such as Japanese, threaten to bolt.

Out there in the dark, a snapping twig not only can sound like a bomb, but can have the impact of one as well.

End Adv PMs Tuesday, March 31.

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