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     How Well Do You Know ... Market Declines?

September's market drops left many investors queasy -- and fearful about more declines ahead.

To students of the stock market, October has an interesting history: It was in October in 1929 that stocks crashed. In a dive many investors can chillingly recall today, the stock market fell 508 points, or 23%, on Oct. 19, 1987.

The market fell 7.2% on a single day in October 1997. We decided to use our monthly quiz to separate fact from fiction about past market declines. Here goes, test your knowledge:

1) According to John Brooks' "Once in Golconda," an account of the 1929 crash, which is true of the late 1920s?

A. Brokers' loans to speculators had shot up to unprecedented levels.
B. Unscrupulous investment pools were proliferating. Their goal was to manipulate the ticker tape, to lure in the gullible with seemingly ever-rising stock prices.
C. As pool operations hit a high-water mark, so did Cadillac sales in New York City.
D. The St. George in Brooklyn Heights, a hotel near Wall Street, had scores of late arrivals each night, as employees handling the trading volume worked too late to go home.
E. All of the above.

ANSWER: E. Another late '20s fact from Mr. Brooks's book: Asked about members' health with such heavy work loads, the New York Stock Exchange's doctor responded that none had suffered nervous breakdowns, quipping: "They're all making money."

2) According to Mr. Brooks, which isn't true of the days just before the 1929 crash?

A. Large segments of the U.S. stock market had been depressed for a year or more, even as well-publicized indexes were at record highs.
B. Market-index highs that were to endure for more than a quarter of a century were hit just after Labor Day of 1929.
C. Wall Street began October 1929 in a mood of optimism because brokers' loans kept increasing, suggesting more and more people were still coming into the market.

ANSWER: C. Rumors had been circulating on Wall Street of giant investment pools of bearish bets, and warnings of a crash were mounting, so October opened amid pessimism.

The Dow Jones Industrial Average fell 12.8% on Oct. 28, 1929, and 11.7% the next day. But contrary to the image today of a sudden crash, many stocks -- Pepsi-Cola, Philip Morris and Studebaker among them -- already were well off highs set a year or two earlier. "The persistence of the idea that all stocks were going through the roof in the autumn of 1929 is a monument to the power of popular myth," Mr. Brooks writes.

3) True or false: By late 1930, the worst of the market downturn was over.

ANSWER: False, although many smart minds were convinced better times finally were ahead and plowed more money into the market -- only to see more declines. "The singular feature of the great crash of 1929 was that the worst continued to worsen," writes John Kenneth Galbraith in "The Great Crash 1929." All told, the Dow fell 89% from its 381.17 peak in September 1929, bottoming at 41.22 in 1932. A new record wasn't set until 1954, when it closed at 382.74, according to Dow Jones Indexes.

4) Since 1960, the average bear market has taken stocks down about 31% before they hit bottom, according to Ned Davis Research in Venice, Fla. Was the decline of 1973-1974 above or below this average?

A. above
B. below

ANSWER: A, at 45%. Back then, the Arab oil embargo helped puncture the "nifty fifty" big-company stocks. Stagflation -- a combination of double-digit inflation and economic sluggishness -- proved hard to shake. The Watergate scandal added to the malaise.

5) Which of the following factored into the 1987 collapse?

A. The market was ebullient despite a lackluster economy, fueled by overexuberant "momentum" investors.
B. The dollar was falling sharply, and worries were mounting about the U.S. budget deficit.
C. Institutional investors relied on automated trading programs known as portfolio insurance that led them to ditch stocks at the same moment.
D. Some combination of the above.

ANSWER: D, all of them, according to John Neff, former Vanguard Windsor manager in his book, "On Investing," who rightly predicted at the time that the drop wouldn't have long-lasting ramifications on the economy.

His fund ended 1987 up 1.3%, compared with the broader market's 5.3% gain, while in 1988 the fund advanced nearly 29% to top the market by 12 points.

6) How many times the normal volume were calls to Fidelity Investments on the day of and after the plunge of Oct. 19, 1987?

A. 1.5 times
B. two times
C. three times

Ross MacDonald

ANSWER: B. Busy signals were common at fund firms, and Fidelity told the Journal that about 20% of the 200,000 callers on Oct. 19 hung up before getting through to a representative. Still, redemptions across the industry "weren't particularly heavy" and were handled without problems, according to a spokeswoman for the Securities and Exchange Commission.

7) True or false: The 7% drop in 1997 had its roots in a default of debt by Russia.

ANSWER: False. It was rooted in a currency crisis in Thailand, which roiled markets in Asia before washing ashore in the U.S. and leading many U.S. investors to cash in on strong year-to-date gains. Still, the market rose 33% in 1997, as the tech-stock rally kept rolling.

Russia did rattle markets the following year, announcing a moratorium on repayment of certain debt. U.S. stocks rose robustly that year, too -- up nearly 29%.

8) True or false: There is a silver lining from long stretches of dismal market performance. Periods of poor returns are always soon followed by periods of better ones.

ANSWER: False. Short-run returns are unpredictable and buying on dips isn't always rewarded in the near term, says Donald Bennyhoff of Vanguard's investment-strategy group. The "average" annual total return for the U.S. stock market was 10.3% from 1926 to 2007. It is an accurate number for that period specifically, but shouldn't be viewed as an "entitlement" or for setting expectations for next year -- or the year after. "I think all can agree that the return pattern for stocks is volatile," he says, noting that the market (as measured by the Standard & Poor's 500-stock index) didn't provide an annual return within plus or minus four percentage points of the long-run average in 72 of the 82 years that comprise the average.

9) True or false: Computer-based stock-trading models blew up in the faces of investors not just in 1987 but again last year.

ANSWER: True. In each instance, large numbers of big market players were using models that didn't take into account what would happen if others using similar models sold at the same time.

Under portfolio insurance in 1987, investors aimed to protect themselves from losses by making sales in stock-futures markets under certain circumstances. Last year, hedge funds -- those largely unregulated investment pools for the wealthy -- were prompted by the subprime-mortgage crisis to unwind the same type of trades at the same time, roiling markets.

10) Since 1960, the average bear market has lasted how long?

A. seven months
B. 14 months
C. 28 months

ANSWER: B, says Ned Davis Research.