The '87 Crash: 20 Years Later

Elaine Garzarelli

Garzarelli is president of Garzarelli Research. She was following the markets at Shearson American Express when she predicted the 1987 crash.

Were you a bull or bear?
Bearish, because my stock market 14 indicator composite dropped to 9%, and a sell signal is 30% or below. A buy signal is 65% and a correction signal of 10-15%, is 42%. My indicators include economic, monetary, valuation, and sentiment variables. Each category is worth 25% and the total amount of variables under the four categories combined is 14. The stock market was 30% overvalued by Oct. 12, 1987. I predicted a "market collapse like 1929" on Oct. 12 on CNN's Moneyline with Lou Dobbs. I also told USA Today that my indicators dropped to 9% the day after. It was in a Shearson report as well. The credit for predicting the crash, however, did not come until the Wall Street Journal noticed my $600 million mutual fund was up 5% the day of the crash and a prediction I made later was noted as causing a market decline.

What do you remember most?
I remember how upset our clients were and I spent a lot of the day on the phone with them. I told them that Alan Greenspan would do whatever it takes to stop the turmoil. I told them it was good that the overvaluation was being corrected so quickly. I went to a Japanese restaurant that evening with friends and celebrated because the mutual fund that I was managing was up because I was net short. It was up 5% and the market was down over 20%.

What's different now?
The S&P 500 is 30% undervalued now, and my indicators are over 65%.

Lessons learned:
The Fed will come to the aid in times of stress or crisis. Greenspan said he would ease in a crisis and I learned he was telling the truth. He was also good in predicting overvaluation in December, 1996, as "irrational exuberance." The market followed S&P earnings, which rose, instead of following income-tax profits, which dropped from 1997 to 2001. Shareholders' earnings were distorted by companies such as Enron and the fraud that was apparent later on. The stock market should have stopped rising in 1997, but instead went into a bubble. By 1999, our indicators showed the S&P 500 was overvalued by 50%!