Everyone has an opinion on the stock market nowadays.
Three months after the Federal Reserve said prices were stretched in some stocks, the International Monetary Fund weighed in with its own warning, saying the risk of equity losses in 2014 has risen and stock valuations may be “frothy.” Pushed also by global economic concerns, the Standard & Poor’s 500 Index (SPX) opened lower and was down 1.5 percent at 1,935.10 at 4 p.m. in New York.
While caution on valuations comes as policy makers debate whether six years of near-zero interest rates are inflating bubbles, acting on the Fed’s concern about small-caps and biotechnology shares yielded mixed results. Since the
comments on July 15, the Russell 2000 Index (RTY) is down 6.7 percent, while the Nasdaq Biotechnology Index rallied almost 6 percent.
“We don’t put much into what they say from a market perspective,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in an interview. “They must be getting nervous as to where the growth is. The recent volatility we have been having is due to growth scare out of Europe and that is still the problem.”
Growth Forecast
U.S. stocks declined today as the IMF cut its economic growth forecast and data showed German industrial production fell the most since 2009. The S&P 500 has retreated 3.8 percent since a record in mid-September.According to the IMF report, a sustained period of policy interest rates near zero in advanced economies has raised the risk that some financial markets may be overheating.
“Downside risks related to an equity price correction in 2014 have also risen, consistent with the notion that some valuations could be frothy,” the group said without naming specific markets.
“We don’t share the view of a frothy market,” Frederic Dickson, who helps oversee $45 billion as the chief investment strategist of D.A. Davidson & Co., said by phone from Baltimore. “Where there has been froth in the market, it’s been with some high-flying, small-cap, illiquid stocks that have taken a beating in the last three months.”
With a valuation of almost 18 times earnings, the S&P 500 is at the same multiple as in October 2007, the beginning of the last bear market. Compared with the dot-com bubble, the S&P 500’s valuation is about 60 percent below the level from 1999.
Greenspan’s View
The Nasdaq 100 Index traded at price-earnings ratios between 28 and 69 during the five-year bull market that began at the end of 2002. The gauge, tracking some of the biggest technology companies, has a multiple of 23.5 today, according to data compiled by Bloomberg.Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said today at the Fortune’s Most Powerful Women Summit in Laguna Niguel, California that stocks are now “in a zone of reasonableness.”
Former Fed Chairman Alan Greenspan said on July 30 that equities would see a decline after surging virtually uninterrupted for the past three years. That came six months after a CNBC interview in which he said “stocks, in a long-term sense, are still undervalued by any objective measure.”
Fed Bank of Dallas President Richard Fisher cautioned on March 5 that there were signs in financial markets indicating central bank bond-buying may be emboldening investors to take excessive risks.
“We must monitor these indicators very carefully so as to ensure that the ghost of ‘irrational exuberance’ does not haunt us again,” Fisher said in a Mexico City address. The S&P 500 has climbed 3.3 percent since then.
Risky Credits
Federal Reserve Governor Daniel Tarullo said in February that central bankers must preserve the option of using interest rates to lean against dangerous financial bubbles even as they strengthen supervisory tools to curtail systemic risk.“High-yield corporate bond and leveraged loan funds, for instance, have seen strong inflows, reflecting greater investor appetite for risky corporate credits, while underwriting standards have deteriorated, raising the possibility of large losses going forward,” Tarullo said at the time. “Valuations do appear stretched for farmland, although recent data are suggesting some slowing, and for the equity prices of some small technology firms.”
The IMF said today that the world economy will grow 3.8 percent next year, compared with a July forecast for 4 percent, after a 3.3 percent expansion this year. Raising growth in emerging and advanced economies “must remain a priority,” according to the report .
“If you tell me the world economy will grow 3.8 percent next year, then I find that pretty bullish,” Howard Ward, chief investment officer for growth equities at Rye, New York-based Gamco Investors Inc., which oversees about $47 billion, wrote in an e-mail. “Markets are forward looking, aren’t they?”
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