Arab Times

Yes, stocks are pricey. But too ex­pen­sive?

‘ Stocks have climbed this high on ex­pec­ta­tions that prof­its and the econ­omy will re­sume grow­ing after a vac­cine for the new coro­n­avirus ’ hits the mar­ket. Fund man­agers rank an­other tech bub­ble as the No. 2 risk

- Business · Americas Stock Markets · US Stock Markets · Finance · Stocks & Markets · Wall Street · S&P 500 · Financial Markets · New York City · Yale University · Warren Buffett · United States of America · Bank of America · Federal Reserve System · Goldman Sachs Group

NEW YORK, Sept 17, (AP): Yes, stocks are ex­pen­sive. Most ev­ery­one along Wall Street agrees on that fol­low­ing their amaz­ing re­turn to records de­spite the still-rag­ing pan­demic.

But whether that’s some­thing to worry about? An­other ques­tion en­tirely.

An­a­lysts have many ways to mea­sure whether a stock is over- or un­der-val­ued, rather than sim­ply look­ing at its price. Be­cause stocks tend to move with cor­po­rate prof­its over the long term, one fa­vored method is to di­vide a stock’s price by how much profit per share the com­pany made over the prior 12 months. The higher that num­ber is, the more ex­pen­sive - and less at­trac­tive - the stock is.

By that mea­sure, the S&P 500 this month hit its most ex­pen­sive level since late 2000, shortly after the dot-com bub­ble burst.

The in­dex also looks pricey by other mea­sures. Com­pared to what an­a­lysts are fore­cast­ing for its earn­ings in the up­com­ing 12 months, the S&P 500 ear­lier this month also was

at its high­est level since 2000.

A third mea­sur­ing stick, pop­u­lar­ized by No­bel prize-win­ning econ­o­mist Robert Shiller at Yale Univer­sity, says the S&P 500 was re­cently trad­ing at more than 30 times its av­er­age earn­ings over the

last 10 years, ad­justed for in­fla­tion. That’s above its av­er­age of 26.1 over the last decade or of 20.5 over the last 50 years.

High val­u­a­tions are noth­ing new, when seen through the lens of what’s of­ten called the “Buf­fett in­di­ca­tor,” which is named after famed value in­vestor War­ren Buf­fett and looks at the to­tal mar­ket value of stocks rel­a­tive to the over­all size of the econ­omy. It’s been higher than the U.S. gross do­mes­tic prod­uct from 2010 on­ward.

The ar­gu­ment for be­ing wor­ried about such num­bers is sim­ple: When stock prices are high, com­pared with cor­po­rate prof­its, they leave lit­tle room for er­ror and mean stocks may not be worth their price tags. Such wor­ries got some val­i­da­tion in re­cent weeks after stocks with some of the high­est val­u­a­tions - tech­nol­ogy stocks - slumped sharply for no clear rea­son.

Global fund man­agers rank an­other tech bub­ble as the No. 2 risk that could swamp in­vest­ments, just after a sec­ond wave of coro­n­avirus in­fec­tions, ac­cord­ing to the most re­cent monthly sur­vey by BofA Global Re­search.

“The ar­gu­ment for be­ing OK with high val­u­a­tions is more nu­anced. Stocks have climbed this high on ex­pec­ta­tions that prof­its and the econ­omy will re­sume grow­ing after a vac­cine for the new coro­n­avirus hits the mar­ket.” That may come as early as the first three months of 2021, ac­cord­ing to many in­vestors.

Also, in­ter­est rates have al­most never been this low be­fore. The Fed­eral Re­serve has said it will keep short-term rates pinned at nearly zero for a while to help the econ­omy re­cover, and it may even wait to raise rates un­til after in­fla­tion rises above its tar­get level. On Wed­nes­day, it voted again not to touch short-term rates.

Lower in­ter­est rates gen­er­ally mean higher val­u­a­tions for stocks. For one, it means bonds are pay­ing less in in­ter­est, which makes them rel­a­tively less ap­peal­ing than stocks. It also means the fu­ture cash flows that com­pa­nies are ex­pected to gen­er­ate are worth more in to­day’s dol­lars than they would have been if in­ter­est rates were higher.

That’s part of the rea­son why Gold­man Sachs strate­gists say the S&P 500 could end the year at 3,600, a nearly 6% rise from Tues­day’s close, although they ac­knowl­edge to­day’s val­u­a­tions are al­ready high.

 ??  ?? The ‘Fear­less Girl’ bronze sculp­ture looks to­wards the New York Stock Ex­change on Sept 10, in New York. Most ev­ery­one along Wall Street agrees that stocks are ex­pen­sive fol­low­ing their amaz­ing re­turn to records de­spite
the still-rag­ing pan­demic. (AP)
The ‘Fear­less Girl’ bronze sculp­ture looks to­wards the New York Stock Ex­change on Sept 10, in New York. Most ev­ery­one along Wall Street agrees that stocks are ex­pen­sive fol­low­ing their amaz­ing re­turn to records de­spite the still-rag­ing pan­demic. (AP)

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