The Week in Review
- Market Crash: 30 Years Later
- No Exuberance, No Complacency
- Are We Closer to Tax Reform?
- Looking Ahead
While this week finds us reflecting on a historic market event, nothing in the recent corporate earnings or global economic data suggests that we’re on shaky ground. Third-quarter earnings reported thus far show that even if a few individual companies may have stumbled, as some always will, the general trend is that businesses have managed to continue to add to profits in a slow-growth economic environment.
For the year through Thursday, the Dow Jones Industrial Average has returned 19.4%, while the broader S&P 500 has gained 16.3%. The MSCI EAFE index, a measure of developed international stock markets, is up 22.0%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has slid to 2.58% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.3% for the year.
Market Crash: 30 Years Later
Thursday marked the 30th anniversary of a date that many investors will never forget: “Black Monday,” October 19, 1987. On that infamous day, the Dow Jones Industrial Average plunged 508 points—amounting to a 22.6% loss.
Today, with the Dow closing above 23100, many investors are more nervous than euphoric. At current levels, a 500-point drop in the Dow would register a 2.2% decline—enough to rattle some investors’ nerves but probably not enough to spark a selling panic. What would it take to experience another October 1987-style drop? The Dow would have to decline by more than 5200 points, something we don’t expect.
Still, could a 22% drop in one day happen again? We can’t completely rule out that possibility given the increasingly computer-driven trading environment on Wall Street. However, given what we know about the health of our economy, we see no economic reason for a plunge. Plus, the financial markets have evolved since 1987. Information travels differently; most people heard about the 1987 crash through word of mouth (and rumor) in those pre-Internet days, and investor panic fed on itself. In today’s instant 24-hour news cycle, a different type of anxiety might ensue, but it also might be nipped in the bud just as quickly.
That doesn’t mean we are complacent. While market rallies and swoons don’t follow a set calendar, it has been 18 months since we last experienced a normal correction—a decline of at least 10% in the S&P 500 index. We’re due, and we think a correction would be beneficial for long-term investors like us (even if it is lousy for traders). Do we know when it’s coming? No. No one does. But, again, we’re investors, not traders. A 500-point drop or two in the Dow—remember, just 2.2% today vs. 22.6% on Black Monday—would send undisciplined investors scurrying for cover and leave bargain opportunities to be found.
No Exuberance, No Complacency
From that record percentage drop, let’s turn our attention to recent record highs. Are the Dow’s lofty heights a sign that “irrational exuberance”—in former Fed Chair Alan Greenspan’s memorable 1996 phrase—has returned to the stock markets? We don’t think so. While levels of cash held by money managers are coming down (they’re doing more buying than hoarding), cash positions are still above average historic levels. And most of that cash isn’t going into the S&P 500; more cash is going into corporate bond funds than domestic stock funds. Investors have also favored foreign stock funds and money market funds over U.S. stock funds. That doesn’t sound like irrational exuberance to us.
Are We Closer to Tax Reform?
Last night, the U.S. Senate passed a budget resolution as the first tangible step toward the tax reform many investors have been banking on. Even as tax legislation remains far from a sure thing, and intended and unintended consequences could just as easily upend the markets as propel them higher, many investors cheered the news at the end of another banner week for stocks.
With markets at home and abroad in (or near) record-breaking territory, we remain ever-vigilant about the risks and opportunities.
Next week, third-quarter earnings reporting continues to ramp up, but the trend of businesses profiting despite slow global economic growth looks firm.
That means we’re heading back to the mode of event-driven news and attendant guesswork being the likely attention-getters and possible market-movers.
Fortunately, we do get a handful of economic reports worth noting: Purchasing managers indexes, durable goods orders and new home sales. We’ll also get our first glance at third-quarter economic growth, which, after Q2’s 3.1% annualized rate, is likely to exhibit some post-hurricane weakness (that we have been expecting) as temporary disruptions work their way through the numbers.
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Please note: This update was prepared on Friday, October 20, 2017, prior to the market’s close.
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