Dow tops 23,000 for first time as 30th anniversary of 'Black Monday' looms
Approaching the 30th anniversary of the largest single-day drop in U.S. stock market history, the Dow Jones industrial average on Wednesday closed above 23,000 for the first time.
On Oct. 19, 1987, or "Black Monday," the S&P 500 dropped 20.5 percent and the Dow Jones industrial average dropped 22.6 percent. Many analysts expect the stock market to keep growing for at least the next year, and virtually no one is predicting a repeat of Black Monday, the Associated Press reported.
While the current price-to-earnings ratios would suggest the stock market is overheated like in 1987, the measure is based on traditional dividends and doesn't capture the earnings investors are getting from multiple companies buying back their stocks, said Lars Kuehn, an associate professor of finance for Carnegie Mellon University's Tepper School of Business.
When a company buys back stock, it effectively increases the value of the remaining stock on the market.
"If you look at the total return, the market doesn't look that overheated," he said.
A bubble occurs when people rush to buy stocks at prices out of proportion to their value, he said.
"It doesn't feel like a bubble because not everybody is invested," he said. "People are still on the sidelines."
Another local expert is less confident.
"I think the stock market, by any measure, is high," said Riza Emekter, a Robert Morris University finance professor. The economy is growing and unemployment is low, but the stock market is still growing faster than the economy, and that makes a correction inevitable, he said.
"I'm sure the correction is going to come, but I'm not sure when," he said.
Stock market crash inevitable, financial historian says https://t.co/mhy1LYANVg— FOX Business (@FoxBusiness) October 18, 2017
Both agreed one thing that could trigger a correction, a decline of 10 percent or more in stock values, would be Congress failing to pass some kind of tax reform.
Such a failure would be a good excuse for nervous investors to sell off stocks, Emekter said.
"Everybody is looking to everybody. If somebody panics, then everybody will panic," he said.
Since President Trump's election, much of the growth in the stock market has been based on the expectation of tax reform, Kuehn said.
"If they don't get that through, I think there would be disappointment in the markets for sure," he said. "There definitely would be a correction coming if they fail on the tax reforms."
On Wednesday, technology stocks and financial companies were top gainers that led to record highs for the Dow, S&P 500 and Nasdaq, the Associated Press reported. Strong quarterly results drove IBM shares to their biggest one-day gain since 2009.
The Dow rose 160.16 points, or 0.7 percent, to close at 23,157.60. The S&P 500 increased 1.90 points, or 0.1 percent, to 2,561.26, and the Nasdaq added 0.56 points, or 0.01 percent, closing at 6,624.22.
Monday and Tuesday also saw the Dow and S&P 500 set records.
Top market performers since the Dow closed above 22,000 for the first time on Aug. 2 include Boeing, Caterpillar, Goldman, Home Depot and 3M, the Associated Press reported. The Dow is up 3,395 points this year, or 17.2 percent.
One factor separating the current market from the 1987 situation is the diversity of trading venues. In 1987, most trading was done on the New York Stock Exchange and most of the remaining trading was done on the Chicago Mercantile Exchange.
Stocks making the biggest moves after hours: ADBE, EBAY & more https://t.co/tGuUeE1loA— CNBC (@CNBC) October 18, 2017
Today, there are more than a dozen regulated exchanges, more than 30 alternate trading systems and an unknown number of private "dark pool" trading forums.
"Trading is easier and cheaper than it was 30 years ago. That's a good thing," Kuehn said.
The increased competition also makes prices more responsive to information, which makes it harder for bubbles to occur, he said.
Brian Bowling is a Tribune-Review staff writer. Reach him at 724-850-1218, firstname.lastname@example.org or via Twitter @TribBrian.