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As stock prices soar, analysts watch for signs of market downturn

Brian Bowling
| Monday, Aug. 7, 2017, 5:39 p.m.

Steady growth in stock prices for the first half of the year has boosted 401(k) plans, but investors need to be cautious about what the future has in store, local financial experts said.

“We've had a pretty good run for the last half year,” said Lars Kuehn, an associate professor of finance for Carnegie Mellon University's Tepper School of Business.

With exceptionally low volatility in the stock market, most retirement funds should be up for the year. The one caveat is that pensions usually have a target ratio of stocks to bonds, so as stocks improve they tend to sell them off to put more money in bonds.

The ratio of stocks to bonds in retirement plans tends to decrease as people near retirement age, so younger investors probably saw more of a benefit than older investors, he added.

“But overall it's good news,” he said.

Volatility, a measure of swings in stock prices, is the lowest it's been since at least 1972, the Associated Press reported. By some measures, volatility hasn't been this low since 1964.

That probably won't last, particularly if Washington continues to stall on passing the tax and regulatory changes that President Trump promised, Kuehn said.

“You're going to see more up and down swings in the market,” he said.

Other financial indicators haven't posted the same steady growth as stocks, which means a dramatic drop could be on the horizon, said Riza Emekter, a Robert Morris University finance professor.

“The stock market obviously is very high at this point, and every investor should be concerned a little bit,” he said.

The market is not close to the bubble that preceded the collapse in 2000, but “by any historic standard, it's overpriced,” he said.

On the other hand, the economic indicators are good and the market could continue growing, Emekter said.

“It's not easy to make a recommendation,” he said.

While he doesn't see signs of a bubble, the market could be headed for a correction, said Nicholas Besh, investment director of the Pittsburgh market with PNC Wealth Management.

Stock market prices typically drop about 15 percent once a year and then climb back up to end at a higher level than they started, he said.

The last time the market saw a correction, defined as at least a 10 percent drop, was in February 2016 when prices dropped about 12 percent.

Since the market usually recovers and gains ground, the corrections are mainly a concern for people who are retiring, he said.

“If the market has a correction and you're pulling your money out, you have a loss,” Besh said.

There have been only a few times in the stock market's history when people didn't see a return on their investments over a 10-year period, he said. The last was from 2000 to 2010, but the indicators that preceded that period aren't present today, Besh said.

The most likely response to a correction today would be investors seeing it as an opportunity to buy more stocks before prices recovered, he said.

Brian Bowling is a Tribune-Review staff writer. Reach him at 724-850-1218, bbowling@tribweb.com or via Twitter @TribBrian.

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