US stock markets are hitting record highs. But why?
A slowing US economy hasn't dampened Wall Street. Global markets, mergers are a buffer.
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"The issue is profits," he says. "This quarter has been a complete shock to a lot of people," as earnings handily beat expectations.Skip to next paragraph
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The share price for the S&P index is now about 16 times the earnings for its 500 companies, Carey says. That doesn't qualify as cheap on Wall Street. But "it's a pretty reasonable multiple," he says.
Certainly, it reflects a more balanced investor mood than existed in early 2000, just before the dotcom stock bubble burst, which helped set the stage for a wider sell-off.
But if some analysts see the Dow heading from 13000 to 14000 and beyond this year, many also say it could be a volatile ride. Some say it's a good time to remember an old adage on Wall Street: "Sell in May and go away." Historically, the period from May through October has been less favorable for share prices than the winter-to-spring period.
Already, the Dow has had a strong run-up this year. The widely watched index of large US firms traversed from 12000 to 13000 in just 126 days, hitting the new milestone on April 25. In trading Monday morning, the Dow stood near 13300, while the S&P 500 index was a bit above 1500.
Risks loom ahead on several fronts. One debate on Wall Street is how long the tide of profits from overseas – and the merger boom – will continue.
The rest of the world isn't immune from a slowdown in the US, which remains the globe's largest economy and biggest importer of goods. In addition, the large cash pools that are driving corporate mergers could dwindle if economic conditions turn for the worse.
For now, most economic forecasters see no recession looming for the US, despite the housing-market head winds. Yet some of the best-performing stocks recently have been companies that typically do well during slowdowns – relatively "safe" industries such as healthcare, utilities, and telecommunications, according to economists at Merrill Lynch.
"We are due for a [downward stock market] correction, but there's no way of knowing when that might be due," says Michael Cosgrove, who publishes the Econoclast, a market newsletter based in Dallas. He expects stocks to generally post returns of 6 to 8 percent annually over the next several years, but with downs as well as ups along the way. Inflation, and the threat of new government policies that restrict trade or raise taxes, are among the risks to shares prices, he says.
Another economist who tracks the markets, David Ranson, says recent highs in the price of gold – above $690 an ounce – are an indicator of more inflation on the way. This is a question widely debated among economists, and a key topic for Federal Reserve policymakers as they meet in Washington this week. If inflation persists even as the economy slows, that could push up interest rates, making life tougher for corporations that now enjoy a low cost of capital.
Still, Mr. Ranson, who heads H.C. Wainwright & Co., Economics in Hamilton, Mass., expects US stocks to end the year modestly higher than they are today.