How investors can learn from the Smurfs of 1987
By: Anthony Scaramucci
The more financial markets change, the more they stay the same. I’ve been reminded of this fact while watching episodes of Louis Rukeyser’s “Wall Street Week” in preparation for my role as host of the iconic financial television show’s revival. In order to do the show justice I have felt the need to deeply familiarize myself with its fabric, and the experience has been fascinating.
Although the characters in the stories are different, the narratives are largely unchanged. In the ‘80s and ‘90s, the debate about tech stock “bubbles” focused on this crazy idea called the Internet, now it’s on social media and the sharing economy. Back then it was on the implications of portfolio insurance, now it’s on unintended consequences of a highly-electronic tape. Controversy surrounding the Federal Reserve is not a new phenomenon, either.
One historically significant clip I found particularly interesting was the first segment of Wall Street Week on Friday, October 16, 1987—the Friday before the infamous “Black Monday” crash.
Many speculate that today’s Fed is holding off on a rate hike for fear of an extreme, 1987-style stock market dislocation. While I don’t expect anything resembling a repeat of that 22% crash, it’s impossible not to recognize parallels between that moment and history and today.
Below are excerpts from the transcript, starting with Rukeyser’s always-witty opening monologue:
“Louis Rukeyser: Is it any wonder that a study this week reported that Americans’ favorite color is blue? They must have done most of their polling in brokerage offices… But before we all turn the color of Smurfs let's stop and consider what caused all this and where we go from here.
First, let's round up the usual suspects. Interest rates are moving up, a development that hit stocks with a double whammy of higher rates cutting into corporate profits and deterring expansion. In addition [higher rates] increase the attractiveness of other investments that compete with stocks…
Second, jitters over new incidents in the Persian Gulf gave already-nervous traders a fresh excuse to keep on selling.
Third, the political situation was scarcely encouraging – not only the concern over leadership in both parties, but a new tax increase package in the House Ways and Means Committee that would further penalize investment and savings. Nice going, guys.
Fourth, Wall Street itself seemed in disarray with scary layoffs at two major firms and the growing evidence that the mindless computer-driven program trading by the big institutions can turn worry into panic and prudent selling into wholesale desertion.
... thoroughly ignoring, among other things, reassurances about the economy from Treasury Secretary James Baker and Federal Reserve Chairman Alan Greenspan.”
Interest rate anxiety, geo-political concerns, American political ineptitude, financial industry upheaval, market structure cracks and central bank reassurance. Sound familiar? Yes, these are factors that always drive financial markets, but noting how much the bullet point collectively rhyme with today’s Wall of Worry does cause a tinge of angst.
In the panel discussion segment, regular guest Martin Zweig, as he often did, came out looking prescient – not just about 1987, but about market cycles in general.
“LR: Tonight many commentators have been saying, to quote one on-air analyst, the bull is dead. Marty Zweig, one who has been correctly worried about this market lately, do you agree with that comment?
Martin Zweig: Yes. I haven’t been looking for a bear market, per say, I’ve been really in my own mind looking for a crash. You don’t want to talk about [a crash] publicly because it's like shouting fire in a crowded theater. There are other ways to play it - you just tilt your strategy negatively and shut your mouth. I think we're in the middle is something reminiscent of 1946 or 1962, which were very similar, and, to some extent, 1929, but it won't be as bad. And I think we're in the middle, to somewhat beyond middle, of this break and there will be some violent rallies. In fact, by probably early next week I expect a violent rally… I don't look for a long bear market here, I only really look for a brief decline, but a vicious one. In 1962 the damage was done in two months. In 1929 it was done mostly in 10 weeks. And I don't think it's going to drag on any longer than that here. It will just go down more and then turn around. …
LR: How should people play it?
MZ: Very cautiously. I think you’re going to be hurt no matter whether you’re bullish or bearish. There are too many traps to fall into. We should have a selling climax—probably two of them—and after a selling climax they always go back lower. So you’d have, I'd say, three gigantic rallies within the next month or so, and every one of them could be a trap, except for the last one of course [laughs]. But whenever that comes, you don't know. It's hard.
LR: Marty, in his affable way, has used that nasty word crash. Do you accept that [Mary]?
Mary Farrell: No, and I wouldn't accept the estimate that the bull market is over either. Certainly we’re in a correction and that's been more than obvious. I think you have to remember here that we're not dealing with real buyers and real sellers making real buy and sell decisions like the old stock market because you do have this computerized program trading and portfolio insurance really making these very extreme, very rapid decisions. … LR: [to MF] Tell us why you don’t think the bull market is over.
MF: Well I think interest rates are the real key here. At these levels I would have to see some interest rate relief to see the bull market continue into another leg and I don't think that's out of the realm of possibility. We could see some rate declines by next year and that would certainly be a positive at these levels, though I would agree with Marty that we are in for some rough sledding and the risk here really is that interest rates don't give you that relief and then you would continue with more the same.”
For more than three decades “Wall Street Week” was a trusted, leading voice on investing and a must-watch for more than four million American households every weekend. As the custodian of this treasured Wall Street institution I look forward to refocusing the conversation on long-term wealth creation in order to help all types of investors make more enriching decisions.