20 years later, could markets crash again?

The Dow's final 508-point loss wasn't finally tallied until long after the market closed. Money manager Frank Cappiello waited around his office until 7 p.m. to see how the market closed. Depressed, he went home to call Roy Neuberger, founder of the Neuberger & Berman funds, one of the few people he knew who had worked on Wall Street during the 1929 crash. If anyone knew what would happen, Cappiello figured, it was Neuberger. But Neuberger called him first. "Frank," Cappiello recalls Neuberger saying, "You're a smart fellow. What do you think will happen tomorrow?"

The big fear — that it would be 1929 all over again — proved unfounded. Stocks plunged early on Tuesday, Oct. 20, then began to rebound in the afternoon, thanks in part to news of U.S. companies announcing plans to buy back their own battered shares — and a sense the market would survive. Although there were several rocky days after the crash, the market bottomed in December and hit new highs within two years. In contrast, the Dow took almost six years to recoup its losses from the 2000-02 bear market.

Out of the blue

To this day, economists and market historians debate what sparked the Crash of '87, despite a massive investigation by a presidential commission, as well as numerous independent research efforts.

One peculiarity of the crash — and of nearly all declines of 10% or more — is that no single news event drove the selling. The market almost never collapses during a big news event. When President Kennedy was assassinated, the Dow fell 3%. The Dow fell 3% the first trading day after the Japanese attack on Pearl Harbor, and 7% after the Sept. 11 terrorist attacks.

Mark Hulbert, editor of the Hulbert Financial Digest, points to a study that looked for news triggers the day of the 50 largest percentage drops in the stock market. "They came up empty-handed," he says.

But the 1987 crash did confirm that big, devastating meltdowns have several points in common:

•The market makes huge gains beforehand. The Dow soared 44% from the start of 1987 through its Aug. 25, 1987, peak. The Standard & Poor's 500 index had climbed 265% the five years ended August 1987, assuming reinvested dividends. In contrast, the S&P 500 has gained about 92% the past five years.

The run-up to the 1929 crash was even more spectacular: The Dow surged 345% in almost six years.

•Market euphoria reigns. The public doesn't usually focus on the stock market — unless it's skyrocketing. The public's attention was focused on Wall Street in 1987. Tom Wolfe's book The Bonfire of the Vanities, which chronicled Wall Street excesses, was on the best-seller list. And Wall Street, the Oliver Stone movie in which the fictional Gordon Gekko immortalized the line, "Greed is good," was in the works during the crash and premiered in December 1987.

Many argue that it is the swing from mass euphoria to despair that triggers crashes. "The market's trends derive from the mood of the investing herd, which trends and reverses according to its own internal dynamics," says Robert Prechter, president of Elliott Wave International, perhaps the most celebrated of those who got investors out before the crash.

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