Spotlight: Investors confident yet cautious on U.S. stocks market 30 years after 1987 crash

Source: Xinhua| 2017-10-20 05:37:21|Editor: Mu Xuequan
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by Xinhua Writers Sun Oumeng, Wang Wen

NEW YORK, Oct. 19 (Xinhua) -- Thursday marked the 30th anniversary of the 1987 stock market crash, which saw the Dow Jones Industrial Average plunge 22.6 percent in one day.

Even though many analysts said another "Black Monday" is unlikely to happen again today due to a batch of protection methods in Wall Street such as implementation of circuit breakers, cautious traders always kept a close eye on signs of irrational exuberance.

U.S. stocks have posted solid gains since Donald Trump's win in the presidential election in November last year. The Dow Jones Industrial Average has risen over 25 percent since the Election Day and more than 17 percent in 2017 so far.

The 30-stocks index notched the fourth milestone this year on Wednesday, closing above 23,000 for the first time ever, as investors renewed hopes for a comprehensive tax reform while cheering over better-than-expected quarterly earnings.

However, U.S. Treasury Secretary Steven Mnuchin warned Wednesday that the U.S. stock market could fall significantly if Congress does not pass tax reform.

"There's no question in my mind that if we don't get it done you're going to see a reversal of a significant amount of these gains," Mnuchin said in the "Politico Money" podcast.

"I think that the stock market reacted positively to the anticipation or expectation that taxes would go down and that corporations would have greater levels of profitability, while higher level of profitability for corporations leads to higher stock prices," Robert Salomon, associate professor at the Stern School of Business, New York University, told Xinhua in a recent interview.

He echoed Mnuchin's statement that the market will witness a huge reversal movement if President Trump's tax plan does not go through, as market participants who expected profitability to go up and therefore bid up prices will all of a sudden come to the conclusion that tax reform isn't in the offering.

Although some shareholders refuse to rule out the possibility of another stock crash, many analysts believed the equities are probably not in a bubble.

"The level of stock prices reflects investors' collective view of the future trajectory of corporate earnings, reflecting economic growth prospects, as discounted to the present time by the interest rate," Paul Sheard, executive vice president and chief economist of S&P Global, told Xinhua in a recent interview.

U.S. monetary policy remains quite accommodative, which supports equity prices from two directions: keeping corporate profits on a rising trend, reflecting a continued economic expansion, and keeping the discount rate low.

"The current level of stock prices is elevated and valuations are on the 'rich' side, but lie within a valuation range that remains able to be explained by the economic and monetary policy fundamentals," said the expert.

The valuation of U.S. stocks is above historical averages and high relative to other global markets, Brendan Ahern, chief investment officer of Krane Funds Advisors, told Xinhua.

"Record low interest rates can support such valuations as the weakness of the U.S. dollar will help the country's multi-nationals compete globally," Ahern said.

Sheard said the level of stock prices can always fluctuate and undergo "corrections," but given the economic outlook and the careful and measured way in which the Federal Reserve is "normalizing" monetary policy there is no compelling reason to characterize the stock market as currently being in a bubble.

"A stock market bubble occurs when stock prices detach from underlying fundamentals and keep rising because investors expect them to rise and past price rises validate those expectations, calling forth yet still more price rises, this self-fulfilling bubble process driving stock prices further and further away fundamentals, until they eventually reach an unsustainable peak and the process of self-sustaining price rises moves into reverse (the bubble unwinds)," said Sheard.

"The U.S. stock market does not appear to be in this kind of bubble territory currently," he added.