Last week marked 30 years since the stock market crash of 1987, also known as Black Monday. I do believe the time is right to reflect on this anniversary, and look at this in relation to the current state of affairs. 
Recently, global stock markets have continued to race ahead, none more so that the US markets. One popular indicator is the Dow Jones Industrial Average, often simply abbreviated to ‘The Dow’.
One year ago, the Dow was trading at around 18,000 points, but today it has surpassed the 23,000 mark, with an increase of over 27 per cent. The index itself is made-up of 30 companies, which everybody will be familiar with. These include Apple, Boeing, Coca-Cola, McDonald’s, Nike and Walt Disney, to name but a few; a ‘who’s who’ of capitalism, if you like.
On Black Monday, the Dow fell 22 per cent, on what many believed to be a combination of electronic trading, illiquidity and market psychology.
While we are not forecasting the next crash, should the Dow fall by the same percentage, it will return the index back to around 18,800 points.
Whether this illustrates the enormity of the crash back in 1987 or the enormity of the rise of the index since Donald Trump arrived on the scene, I haven’t quite decided.
One reason for this marked increase in the Dow recently can partially be put down to the tax reforms that Mr Trump is trying to push through, also known as the Trump trade. Thanks to the Senate, these reforms look like they are a step closer with the passage of a budget blueprint last Thursday evening, which could see as much as a $1.5trn tax cut for Americans. The final approval could happen late this year or early 2018.
This is likely to further fuel the rises in markets across the pond, and some are even saying this could be the turning point of Donald Trump’s presidency. However, there is also some real concern amongst market analysts that a correction is long overdue.
Even with these potential tax reforms, is this enough to warrant such a leap in the fortunes of these multi-national conglomerates?
Well firstly with the Dow Jones being a price weighted index, companies with a higher share price will have a greater influence on the index. The index is calculated by adding up the individual share prices of all thirty companies and dividing it by the Dow divisor.
Performance of the Dow YTD
Source: S&P Dow Jones Indices
This means a company like Boeing with its current share price of $250 has more of an impact on the index than Apple which has a share price of $155. This is despite the fact that Apple in terms of market capitalisation (number of shares multiplied by current market price) is over four times the size of Boeing. Therefore, you do have to take the value of this index with a pinch of salt.
Nevertheless, Donald Trump is aiming to lower the corporate tax rate from 35 per cent to 20 per cent, which is quite a significant drop. This would be an undoubtable benefit to many US companies, but we are somewhat dubious about the benefits to the constituents that make up the Dow. These are large multinationals conglomerates that are very good, and somewhat renowned for paying as little tax as possible.
Just take Apple for example; it holds roughly $215bn in foreign jurisdictions, while holding less than $20bn on US soil. Much of this overseas cash pile is held in Ireland that has a corporate tax rate of just 12.5 per cent, and in some cases by using some very clever international accounting manoeuvres Apple have paid as little as 3.5 per cent tax.
So while Donald Trump’s tax reforms are significant, we are not sure that these should have had this kind of impact, especially as in likelihood the majority of these companies are not paying 20 per cent corporate tax in the first place, let alone the current rate of 35 per cent.
Currently it is becoming more difficult to make an investment case for North America. Our main concern here is not a market crash necessarily; but US markets are the most overanalysed markets in the world and are one of the most efficient. This leaves very little head room for stock picking and finding value.
Over the last 10 years North American funds have returned 164.62 per cent. When compared to the S&P 500 this has returned 164.60 per cent.
Worse still, when you look at the Dow Jones you can see that this has returned 246.11 per cent over the last ten years.
Fund managers that invest in North America have a notoriously hard time in trying to outperform the market and out of the small number that do, even fewer mangers to do it on a consistent basis.
To conclude, if Donald Trump does manage to get all his tax reforms through we see very limited upside. The current cyclically adjusted price-to-earnings ratio (CAPE) of the S&P 500 is 31.42, against an historical average of 16.8. So with US markets being very efficient coupled with lofty valuations it leaves very little headroom.
Performance of IA North America sector vs S&P 500 over 10yrs
Source: FE Analytics
Furthermore, combine this with a strong US dollar against a weak pound and the case becomes even weaker.
Any progress in relation to Brexit will see sterling rally against the US dollar, and even if the US markets continue to rise, a more expensive pound can mean you get back less than you invest.
What isn’t in doubt is Donald Trump taking credit for the rise in the stock market. Any follower of his on Twitter will see that he has already done this; however, one suspects that he won’t be taking credit for any market falls.
Guy Stephens is technical investment director at Rowan Dartington. The views expressed above are his own and should not be taken as investment advice.