1987 STOCK MARKET CRASH (22% IN ONE DAY!)

I was investing on October 19, 1987 when the market crashed 22.68% on what has become known as Black Monday after a Friday drop of  4.6% on record volume*  from a much lower level than today.   At that time, trades were still done by hand and  I couldn't even get my broker on the phone.  By year end, both the DJIA and the S&P 500 ended up about 3%, not a lot but certainly not as bad as it looked at one time.  Thus I was nervous last Friday when the D{JIA dropped more than 500 pts in a day,because of the bounce back in 1987, I wouldn't despair yet.  Remember also that the stock market has risen in each year of President Obama's terms and that the year before a presidential election (as this one is) is often the best year of the presidential stock market cycle. 

While, the P/E of the DJIA at the close of business on Monday is within the "normal" range (15.19), the S&P 500 is still high, though the dividend is much higher than a year ago (2.71% Monday vs 2.23% a year ago).  The P/E of the S&P 500, however, is still in the "bubble" range (21.63) although there too, the dividend is much higher than a year ago (206% vs 1.90).**

Both the DOW Utility and DOW Transportation indices are still somewhat high (16.30 and 17.10) though the dividends of both are much higher than a year ago ( 3.65% vs 2.71% and 1.49% vs 1.09% respectively).**

I don't know what is normal for the Russell 2000, but the P/E is actually higher than a year ago (89.22 vs 78.97) although the dividend is much higher today (1.48% vs 1.29%). Although I also don't know what is normal for the NASDAQ 100, the P/E still looks in the "bubble" range though a tad smaller than year ago (22.35 vs 23.06 a year ago).  In this case, however, the dividend is also somewhat smaller  (1.21% vs 1.28%).**

While the U.S. economy has only 13+% of its GDP dependent on exports, a stronger dollar would hurt our economy only a little bit.  A stronger dollar, however, would hurt the country more; however, the dollar index has gone the other way (for now) at 93.33 on Monday, down from 96.81 a week ago.

Our exports grew by 27% from 2009 through 2013, adjusted for inflation. China, it should be remembered China is only number 3 of our export countries, Mexico and Canada each being larger.  See predominant export and import by state:***

Predominant Export by state:

 Predominant Import by State:

* https://en.wikipedia.org/wiki/Black_Monday_(1987)
** http://online.wsj.com/mdc/public/page/2_3021-peyield.html
*** http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS;
http://trade.gov/neinext/role-of-exports-in-us-economy.pdf;
http://www.ibtimes.com/us-economy-2015-check-out-top-imports-exports-every-us-state-1910766

WHAT'S IN IT FOR ME?

The broadcast media seem to have only heard the part of Obama's State Of The Union speech dealing with fairness on taxes. Briefly they said he missed an important thing of "What's In It For Me?" for the average voter. While tax fairness for both individuals and business was an important part; however, he did deal with the question "What's in it for me?" He spent a good deal of the speech talking about in sourcing of jobs and challenging business to find ways of finding more ways to increase jobs in the U.S. He also commented on his pledge to double exports in five years and said it was ahead of schedule. All this dealt with jobs, seemingly missed by the news media. Was it missed by the workers also?

It has always seemed unfair to me that unearned income (e.g. capital gains, dividends, carried interest, etc.) gets tax breaks, and the burden of taxes comes on earned income. I've always felt it should be the other way around. But he who has the gold rules, as they say on a twist of the Golden Rule, so the wealthy have skewed the the tax code in their favor and I'm sure most wealthy feel they deserve it.

THE TROUBLE WITH INCOME TAX CUTS

Also see: http://stopcontinentaldrift.blogspot.com/2010/05/effectiveness-of-taxes.html earlier from May 2010.


The trouble with income tax cuts are that they are a very inefficient way to stimulate the economy, in spite of what certain people may say. The wealthy buy Treasury bonds and notes and the middle class pay off debt. Although both are admirable, they don't stimulate the economy. The wealthy also buy things that don't stimulate our economy such a purchasing foreign bonds, personal Bombardier jets (Canada), chalets in Switzerland, and islands in the Bahamas (now also islands in Greece) though they may help stimulate the international economy. Yes, there is some investment in new initiatives, but the pay back on those that succeed (and most don't) is rarely immediate and usually takes years. Think of all the years it took Amazon.com to become profitable, for example.

My own suggestion is to let the income taxes expire (just on the wealthy if you prefer) and use some of the revenue to cut corporate income taxes (and let some go for government debt relief). This will make our companies more competitive in exports and, hopefully, cut their prices some domestically. This could lead to more profits stimulating stock prices so that the wealthy could recoup some or all of their income losses.


Slightly modified from post # 63705 in Industry Discussions/ Real Estate Investment Trusts: REITs of Motley Fool