This year will go down simply as the Year of the Crash.
The 508-point nose dive in the Dow Jones industrial average on Oct. 19 and its aftermath easily will rank as the top investment story of a year marked by other major--and some not so major--changes in the investment landscape.
The stunning crash ended a five-year bull market in which the Dow had more than tripled and talk had become commonplace of it reaching 3,600. In a single day, the Dow lost 22.6% of its value. Between Aug. 25, when the Dow peaked at 2,722.42, and the close of trading on Black Monday, the Dow had lost 36.1% of its value, or about $1 trillion.
All Americans were hit by the collapse, regardless of whether they directly owned stocks or mutual funds. Workers and retirees saw the value of their pension funds decline. Colleges and nonprofit organizations saw the value of their endowments shrink.
The crash also prompted investors to re-evaluate their strategies, as risk had been reintroduced to a market that for five years had barely seen any major correction. While some investors saw the crash as an opportunity to buy stocks at bargain prices, others rushed instead to safer Treasury bills, certificates of deposit and money market funds as part of a classic flight to quality.
Serious questions arose about the markets and the economy. Will there be a recession or depression? Do the markets need more regulation, and what kinds? Will more individual investors shy away from stocks, leaving the market increasingly to professionals? Will brokerage and mutual fund firms suffer lean times?
Experts also debated why the crash occurred. Blame was placed on everything from computerized program trading to the bulging U.S. trade and budget deficits, from higher interest rates to the departure of Paul A. Volcker as chairman of the Federal Reserve Board and from inexperienced yuppie traders to simple panic.
Perhaps the main reason for the crash was that stocks had simply gotten too high. According to noted Harvard economist John Kenneth Galbraith, the market was simply driven up by speculators who believed that the bull market would keep going higher before turning down. When that belief began to erode, panic and a crash was inevitable.
But the crash wasn't the only significant investment development of 1987. The year also saw more nails hammered into the coffin of tax shelters; new, stratospheric price records for art sold at auction, and roller-coaster rides for interest rates.
Here is a somewhat irreverent look at the investment highlights--and lowlights--of 1987:
Reversals of the Year: E. F. Hutton's new advertising campaign. It used to be that when the brokerage firm talked, people listened. Now, "when people talk, E. F. Hutton listens." The firm claims that the change was in the works before the crash.
Ivan Boesky. Wall Street's premier insider trading felon, banned from the securities business for life, now has gotten religion. He is a full-time student of Talmudic studies at the Jewish Theological Seminary in New York.
Hassles of the Year:
The new W-4 withholding form. Developed by the Internal Revenue Service to reflect changes under tax reform, but never tested upon the public, the complicated W-4 caused such a taxpayer uproar that the IRS was forced to issue a simplified version.
Trying to get through by telephone to your no-load mutual fund or discount broker on Black Monday.
Acronyms of the Year: Tax reform spurred a host of creative alphabet plays. The best were PIGs and PALs. PIGs, or passive income generators, are partnerships that produce income offset by losses from old-fashioned tax shelters, known as passive-activity losses, or PALs. In other words, PIGs are a PALs' best friend.
Things That Went Down:
Boyd Jefferies and Martin A. Siegel, who joined Dennis Levine, Ivan Boesky and other investment bankers, speculators and brokers caught with their hands in the insider-trading cookie jar.
Savings rate. Despite tax cuts, which increase the after-tax return of savings, Americans' propensities to save as a percentage of their total income continued to fall in 1987.
The dollar. It has fallen about 12% against the Japanese yen since late February.
The market for newly issued municipal bonds. Thanks to limitations under tax reform and rising interest rates, volume of new issues plummeted in 1987, prompting widespread staff cuts among dealers.
The attractiveness of individual retirement accounts. "Everybody's tax shelter" took a hit from tax reform, which made them much less attractive for higher-income individuals with company pension plans.
Bond prices in April and early May. Thanks to sharp rises in interest rates, prices of municipal bonds fell as much as 15% in that period.
Sales of tax-oriented private limited partnerships. Sales of these tax shelters for the wealthy, their benefits rolled back thanks to tax reform, were off 65% through the first seven months of 1987.
Things That Should Have Gone Down but Hardly Did: