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BUSINESS Monday 23 october 2017
A25

Have we seen this story before? Black Monday 30 years later

By STAN CHOE may end the year at 2,650
AP Business Writer if tax reform passes, which
NEW YORK (AP) — How would be a roughly 3.5 per-
long can this nirvana last cent gain from Tuesday’s
for investors? close. But if reform doesn’t
The stock market keeps happen by then, the in-
ticking methodically higher dex may end the year at
into record territory, and 2,400, down 6.3 percent
the Dow Jones industrial from Wednesday’s close
average closed above of 2,561.26. If the dollar
23,000 for the first time on jumps in value, meanwhile,
Wednesday. It’s been near- it would cut into the profits
ly 16 months since S&P 500 that multinationals have
index funds had a pullback been making from their
of even 5 percent over the overseas sales.
course of days or weeks, — North Korea and other
the longest such streak in hotspots around the world
two decades. remain big unknowns. An-
Many analysts expect the alysts call this “geopolitical
market to keep climbing, at risk,” and one of the rea-
least for the next year. The sons it’s so scary for inves-
global economy is improv- tors is that it’s not possible
ing, corporate profits are to predict. “There are a lot
rising and inflation remains In this Oct. 19, 1987, photo, traders work on the floor of the New York Stock Exchange. What if the of dangerous things going
stock market plunged 20 percent tomorrow? The question may seem absurd when the market is
low but not so low that it in the midst of one of its calmest runs in history and at record highs. But it’s what investors had to on,” said John Vail, chief
makes economists nervous. deal with 30 years ago, when “Black Monday” blasted stocks on Oct. 19, 1987. global strategist at Nikko
But as investors learned so (AP Photo/Peter Morgan) Asset Management. Be-
painfully 30 years ago, mar- face. While they may not By themselves, stock prices borrowing more expensive sides the worsening war of
kets can shift quickly. On cause a 20 percent drop in rising faster than earnings for companies, and those words between North Ko-
Oct. 19, 1987, the S&P 500 one day, they could be the aren’t enough to cause bigger interest payments rea and the United States,
plummeted 20.5 percent spark for the market’s next markets to buckle. The could erode profits, at least he listed Ukraine and Syria
to wipe out what had been drop of 5 percent or more, stock market stayed at or modestly. Some investors as other areas with the
sizeable gains for the year. whenever it ends up hap- above this level of price- are even talking about the capability of drawing the
Virtually no one is predict- pening. to-earnings for years fol- slim possibility that the Fed world’s big powers into
ing a repeat of “Black Mon- Here are a few potential lowing the summer of 1997. will raise rates more quickly conflict. So far, investors
day,” which was the stock stumbling blocks for a stock But they’re enough to give than it anticipates, if infla- have shrugged off such
market’s worst day in history market that’s more than some strategists pause. tion picks up from its current worries, but for how much
and happened when con- tripled since its 2009 bot- — The Fed is tightening. The slow pace. “Our downside longer?q
ditions were different from tom in the Great Reces- Federal Reserve slashed scenario is that inflation be-
today. But several worries sion, including a surge of short-term interest rates to comes too hot and central
are circulating underneath 20 percent over the last 12 near zero in response to the banks wake up to the fact
the market’s placid sur- months: 2008 financial crisis. It also that they’re behind the
— Stocks are expensive. took the unprecedented curve,” said Jon Adams,
Even the most optimistic step of purchasing trillions senior investment strategist
analysts wouldn’t call the of dollars of bonds to keep at BMO Global Asset Man-
market cheap. Stock prices rates low. Those low rates agement. — Tax reform
tend to follow the trend of meant bonds were paying may fail, or the dollar may
corporate profits over the little in interest, and inves- jump in value. Stocks have
long term, but stocks have tors moved into stocks in recently received a boost
been rising more quickly search of greater returns. from rising expectations
than earnings recently. Now the Fed is slowly pull- Washington will be able to
The S&P 500 is trading at 31 ing back. This month it cut tax rates. Lower taxes
times its average earnings started paring back its $4.5 could mean bigger profits
over the last 10 years, after trillion in bond investments. for companies and likely
adjusting for inflation, ac- And many investors expect launch another round of
cording to data compiled the central bank to raise stock repurchases by busi-
by Yale economist Robert short-term interest rates at nesses. But if Washington
Shiller. That’s the highest its meeting in December, stumbles, the disappoint-
level since the summer of which would be the third ment could drag down
2001, when the dot-com increase this year. stocks. Strategists at Gold-
bubble was deflating. Higher interest rates make man Sachs say the S&P 500