Monday, May 18, 1998

Market Crash
By Chris Rugaber ([email protected])

As the stock market indices continue their ascent, more and more media outlets are predicting a "crash." From The Economist magazine’s cover story on "America’s asset-price bubble," to Fortune’s recent article on "How Scary is this Market, Really?," the media are ready for a serious market decline.

And who knows? It may come. However, the Fool’s Dale Wettlaufer recently wrote on why some of the traditional market valuations may not be as accurate as they once were, and why the market therefore may not be as overvalued as some think (Evening News, April 14 and April 28). Nevertheless, it wouldn’t surprise me if half the Wise financial journalists in New York have their post-correction stories written, with just the details left to be filled in. They’ve probably already got the meat of their stories down: it was inevitable, here is why it happened, and so on.

Of course, what "it" should be called is open to debate. After all, the Dow Jones Industrial Average could fall 2,000 points and that would only return us to where the market was roughly a year ago. Is that a "crash"? Or a "correction"? Would anyone out there be ready to jump out a window if their stocks happened to return to where they were in, say, March of 1997?

The oracles predicting a decline may be disappointed if it never comes. But they won’t necessarily be vindicated if it does. Anyone can look at some overall numbers and speculate that the market seems overvalued. Simply due to the law of averages, the market is likely to have a downturn of some magnitude someday. The question, of course, is when? If it comes relatively soon after someone predicts a decline, then he or she looks brilliant, but that's no more brilliance than the accuracy of a stopped clock (which is right twice a day).

One illustration of this comes from an excellent market-predicting story told by former Labor Secretary Robert Reich (not that there are that many market-predicting stories out there). Reich writes in the introduction to one of his books that about two weeks before the 1987 stock market drop, he went on television, predicted that the market would decline, and advised everyone to take their money out. "In the weeks following the crash," he writes, "I was inundated with letters from people wanting to subscribe to my investment letter. Politely but regretfully, I informed each of them that I did not publish an investment letter." However, he admitted that "I did not tell them... that I had been making precisely the same prediction for five years."

He had just said the same thing over and over, until finally he was right. Not a bad strategy, if no one is checking up on you. So, if we do see a "crash," "decline," or "correction," and someone crows about having predicted it, simply ask them how many times they’ve predicted "it" before.

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