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On one point most thoughtful Wall Streeters agreed: the market had reached such dizzying heights that a correction of some sort seemed almost inevitable. Propelled by favorable economic news and a wave of multibillion-dollar takeovers, stocks had soared more than 1,000 points since the 1987 crash. But by last August some Wall Streeters were clearly worried. Noted Donald Stone, a floor specialist for Lasker, Stone & Stern: "I've been on the trading floor for 39 years, and I've never seen the market go up so fast for so long without a major break." Yet the bulls kept on running. Just last Monday the market closed at a historic peak of 2791.41, its fifth record high in as many sessions.
The looming anniversary of 1987's crash had prompted many on Wall Street to search for comparisons between 1987's boom and this year's. In an investor newsletter dated Oct. 1, Shearson Lehman Hutton cited twelve ways in which this year's rally seemed more likely to last. Among them:
-- Interest rates were rising then, while they are stable or falling now.
-- The economy was growing unsustainably in 1987, but more gradually this year.
-- Investor sentiment was wildly bullish then, and far more cautious now.
Yet this year's rally has rested on some shaky foundations. Chief among them is the relentless pace of corporate takeovers, which enriched everyone on Wall Street, from stockholders to investment bankers. But the buyouts have been fueled by financing from a junk-bond market that was severely weakened last month when Canadian developer Robert Campeau nearly defaulted on $1.27 billion of debt payments on loans that he had used to acquire Allied Stores and Federated Department Stores. In the wake of Campeau's problems, the money for new takeovers has begun to dry up.
Meanwhile, the Government's chief early-warning gauge of inflation indicated last week that the U.S. economy may be headed for trouble. The Labor Department said its Producer Price Index rose 0.9% in September, or about 10% on an annual basis, to break a three-month string of declining wholesale prices. Earlier in the week, Federal Reserve Chairman Alan Greenspan suggested that the Fed remains wary of inflation and therefore would be averse to easing interest rates. That was not what Wall Street wanted to hear.
The heaviest blow to the market came Friday afternoon. In a three-paragraph statement, UAL said a labor-management group headed by Chairman Stephen Wolf had failed to get enough financing to acquire United. Several banks had apparently balked at the deal, which was to be partly financed through junk bonds. The takeover group said it would submit a revised bid "in the near term," but the announcement stunned investors who had come to view the United deal as the latest sure thing in the 1980s buyout binge. Said John Downey, a trader at the Chicago Board Options Exchange: "The airline stocks have looked like attractive takeover targets. But with the United deal in trouble, everyone started to wonder what other deals might not go through."