Dow crests 23K; can bull market continue?
Corporate profits rising, inflation remains in check
NEW YORK — How long can this nirvana last for investors?
The stock market keeps ticking methodically higher into record territory, and the Dow Jones industrial average closed above 23,000 for the first time on Wednesday. It’s been nearly 16 months since S&P 500 index funds had a pullback of even 5 percent over the course of days or weeks, the longest such streak in two decades.
Many analysts expect the market to keep climbing, at least for the next year. The global economy is improving, corporate profits are rising and inflation remains low but not so low that it makes economists nervous.
But as investors learned so painfully 30 years ago, markets can shift quickly. On Oct. 19, 1987, the S&P 500 plummeted 20.5 percent to wipe out what had been sizeable gains for the year.
Virtually no one is predicting a repeat of “Black Monday,” which was the stock market’s worst day in history and happened when conditions were different from today. But several worries are circulating underneath the market’s placid surface. While they may not cause a 20 percent drop in one day, they could be the spark for the market’s next drop of 5 percent or more, whenever it ends up happening.
Here are a couple of potential stumbling blocks for a stock market that’s more than tripled since its 2009 bottom in the Great Recession, including a surge
of 20 percent over the last 12 months:
Stocks are expensive. Even the most optimistic analysts wouldn’t call the market cheap. Stock prices tend to follow the trend of corporate profits over the long term, but stocks have been rising more quickly than earnings recently. The S&P 500 is trading at 31 times its average earnings over the last 10 years, after adjusting for inflation, according to data compiled by Yale economist Robert Shiller. That’s the highest level since the summer of 2001, when the dot-com bubble was deflating.
By themselves, stock prices rising faster than earnings aren’t enough to cause markets to buckle. The stock market stayed at or above this level of price-toearnings for years following the summer of 1997. But they’re enough to give some strategists pause.
The Fed is tightening. The Federal Reserve slashed short-term interest rates to near zero in response to the 2008 financial crisis. It also took the unprecedented step of purchasing trillions of dollars of bonds to keep rates low. Those low rates meant bonds were paying little in interest, and investors moved into stocks in search of greater returns.
Now the Fed is slowly pulling back. It has started paring back its $4.5 trillion in bond investments, and many expect the central bank to raise short-term interest rates at its meeting in December.