TribLIVE

| Business

 
Larger text Larger text Smaller text Smaller text | Order Photo Reprints

Market trends raise fears of stock bubble

Email Newsletters

Click here to sign up for one of our email newsletters.

On the Grid

From the shale fields to the cooling towers, Trib Total Media covers the energy industry in Western Pennsylvania and beyond. For the latest news and views on gas, coal, electricity and more, check out On the Grid today.

Daily Photo Galleries

'American Coyotes' Series

Traveling by Jeep, boat and foot, Tribune-Review investigative reporter Carl Prine and photojournalist Justin Merriman covered nearly 2,000 miles over two months along the border with Mexico to report on coyotes — the human traffickers who bring illegal immigrants into the United States. Most are Americans working for money and/or drugs. This series reports how their operations have a major impact on life for residents and the environment along the border — and beyond.

By The Associated Press
Tuesday, Nov. 19, 2013, 12:01 a.m.
 

NEW YORK — Is the stock market due for a pullback?

The Dow Jones industrial average has surged 900 points since early October and crossed the 16,000-point threshold on Monday. IPOs are hot again. Small investors, stirred from their post-recession daze, are coming back to stocks. And it's been more than two years since the market has had a significant slump.

Those trends have raised concerns of a stock bubble. They shouldn't, money managers say, because even with the broader market's 26 percent jump this year, stocks aren't overpriced yet.

“Stocks are not cheap, but that does not mean that the stock market is expensive,” said Russ Koesterich, chief investment strategist with Blackrock.

The ratio of stock prices to projected profits for companies in the Standard & Poor's 500 index is 15, according to data from FactSet. That's slightly below the average of 16.2 over the past 15 years and far below the peak of 25 in the late 1990s and early 2000s.

Underneath the rally, most of the fundamentals of this market remain solid. Corporate profit margins are near historic highs, and profits are expected to keep rising. There are no signs that the economy, which is recovering from the 2008 financial crisis and Great Recession, will slip back into a downturn.

All that leaves investors with conflicting feelings. Few regard the stock market as attractive as it was at the beginning of the year, but fewer see an alternative where they should put their money.

Bonds are down 2.1 percent this year, according to the benchmark Barclays U.S. Aggregate bond index. Cash has a near-zero return in money market funds. Gold has dropped 24 percent.

“It's hard to say stocks are expensive when you compare them to any other asset class,” said Brian Hogan, director of equities at Fidelity Investments. “The other options are simply not attractive.”

Bubble or no, there are some signs that stocks are getting pricey.

Individual investors have been returning to the market, often a sign that stocks are reaching their peak. Individual investors poured $167 billion into stock mutual funds this year, according to data from Lipper. In comparison, large institutional investors — such as hedge funds, pension funds, endowments and insurance companies — have put in only $111 billion.

When stocks are valued using an adjusted price-to-earnings ratio developed by Nobel Prize-winning economist Robert Shiller, they seem even more expensive. Shiller's adjusted price-to-earnings ratio averages out the S&P 500's earnings over 10 years, to smooth out the volatility that comes from the booms and busts. Using Shiller's formula, stocks are trading at 24.4 times their previous 10 years' worth of earnings, well above the historic average of 16.5 going back to 1881.

A few Wall Street professionals remain bearish and think stocks are due to fall by 10 percent or more.

“I think a lot of what's driven the market higher recently is simply momentum,” said Jack Ablin, chief investment officer with BMO Private Bank. Ablin thinks stocks are “10 to 15 percent overvalued” at their current levels.

Then there's the elephant that won't leave the room: the Federal Reserve.

The Fed has been buying $85 billion in bonds each month in an effort to keep interest rates low and stimulate the economy. Those purchases have pushed up bond prices and made stocks more attractive in comparison.

The Fed was supposed to start pulling back, or “taper” its purchases, in September. But the central bank surprised investors by voting to delay that move. It isn't expected to change course until early 2014, at the earliest.

Critics say the stimulus has driven too many people into stocks and inflated prices.

Janet Yellen, who has been nominated to lead the Fed starting next year, told the Senate Banking Committee last week that the Fed will keep a close eye on the issue, but said stocks “are not in bubble territory.”

Subscribe today! Click here for our subscription offers.

 

 


Show commenting policy

Most-Read Business Headlines

  1. Insurers: F-150’s aluminum costly to repair
  2. Muni bond funds stressed
  3. $2-per-gallon gas expected by year’s end, but not in Western Pa.
  4. Small business hangs on fate of Export-Import Bank
  5. Kennametal expects to consolidate plants as it shrinks manufacturing in continuing streamlining; profit drops
  6. Chevy tweaks its truck remake
  7. Low fuel pressure may have easy fix
  8. FirstEnergy to build coal waste processing facility in Beaver County
  9. FedEx bid faces in-depth probe of bid to buy Dutch express company
  10. Trib 30 index slips in July; 29 percent drop makes ATI biggest loser
  11. 3 vehicles to keep an eye on for 2016