GE and home sales — What you need to know in markets on Friday

On the 30th anniversary of the worst day in market history, stocks staged a comeback and made it look like, well, nothing happened.

Dow futures were off triple-digits early in the morning but by the time the final bell rang on Wall Street the blue chip index made off with a new record high and a 7 point gain after a slow and steady rally throughout the trading day.

On Friday, busy week for earnings will wrap up with notable results expected in the morning from GE (GE), Honeywell (HON), and Procter & Gamble (PG).

Frederick Florin | AFP | Getty Images. New General Electric CEO Jeff Flannery is expected to announce thousands of corporate-level job cuts as part of a strategic review.

The economic calendar will also be a bit more quiet with only the September report on existing home sales set for release. Economists are looking for a 0.9% drop in sales to an annualized rate of 5.3 million.

A report from Politico also crossed late Thursday which suggested President Donald Trump is currently leaning towards nominating Fed governor Jerome Powell to be the next chair of the Federal Reserve. This report follows a meeting between Trump and current Fed chair Janet Yellen on Thursday.

Reports earlier this week indicated Trump would name his replacement for the top spot at the Federal Reserve early next month.

Valuations and the future

On October 19, 1987, the stock market endured its worst day ever.

The Dow Jones Industrial Average fell 22% in a single session and, in the middle of an economic expansion, the bottom seemingly fell out of the stock market in just hours.

And while the widespread use of portfolio insurance — which, of course, was designed to protect against such drops — has been widely cited as the major catalyst behind the decline, conversations about what market conditions prevailed ahead of the crash persist to this day.

In recent years, the stock market’s seemingly “stretched” valuation has been a topic of worry among those who see the market as ripe for a decline. Yet looking at market conditions in and around the ’87 crash would show that valuations were, well, about average.

As Yahoo Finance’s Sam Ro noted on Thursday, the market’s Shiller price/earnings ratio — which captures roughly how much investors are willing to pay for $1 of earnings per share using a 10-year rolling average — was right around its historical average ahead of “Black Monday.”

Stocks weren’t that expensive relative to history ahead of the “Black Monday” market crash. (Source: multpl.com)

Now, the current lifetime average of the market’s Shiller PE has been dragged higher by elevated valuations seen over the 20 or so years of market history. And as Warren Buffett, among others, has pointed out, the historically low level of interest rates is supporting the market’s current valuation.

But in any case it is not the price of stocks that makes markets crash — it is fear. Because implicit in questions like, “Will there be another crash like 1987?” is a suggestion that we might now know what to look for.

Investors often look for signs of a market or stock ripe for a disappointment by looking at those securities that are overvalued relative to their history.

And yet as the data shows, valuations were not particularly instructive ahead of the ’87 crash, and while elevated valuations suggest lower prospective returns they do not guarantee them. Just as low valuations do not ensure strong returns.

Nobel winner Robert Shiller wrote in The New York Times on Thursday that in 1987, “a powerful feedback loop from human to human — not computer to computer — set the market spinning.”

Nobel Prize-winning economist Robert Shiller.

It was not one bad earnings report, or one bad data point, or anything happening outside of the market itself. The ’87 crash happened as the human participants in markets panicked all at once.

The crash was a spontaneous human panic, and there is little evidence we can anticipate what will set us off. And when.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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