Why are investors so nervous? Stocks look expensive

NEW YORK – The economy is growing, companies are handing out bonuses, the tax rates are plunging and earnings of the company rise.

So why are investors so nervous?

A big reason is that the files are too expensive, says Jack Ablin, chief investment officer of Cresset capital Advisors. And Tuesday the gains in derogation of, he suspects that investors finally grip.

For five years now, the stocks have increased in value twice as fast as the profits, according to a report from the Ablin. Other studies are based on one popular valuation measure, championed by Nobel prize economist Robert Shiller, have noted that the stocks in comparison with the long-term profit has never been so expensive, because the dot-com boom nearly two decades ago.

Just as the art collectors looked at a large painting, it turns out that investors hold shares too much, too.

“Nobody doubts that a Van Gogh is a beautiful work of art, but the price you pay may be too high,” Ablin says. “How much do you want to pay for the profits?”

Even before Donald Trump took office last year, professional investors who manage pension funds and mutual funds showed a rare case of nerves, calling the market “fully priced.” In the sale-buy atmosphere on Wall Street, that was as close to a call to “sell” the stocks that you can get.

Even the Trumpet, the last time a big fan of the stock market gains, had his doubts, calling it a “big bubble” shortly before the elections.

Sure, there are plenty of reasons for optimism about stocks. Tax cuts and deregulation are sure to fatten profits.

Still, the markets have risen fast response — up to 19 percent in 2017 only — and that’s prompted warnings of some of the old time market watchers. Former Federal Reserve Chairman Alan Greenspan told Bloomberg News last week that he thought the stocks were “bubble” territory.

The trigger for the most recent fluctuations in the market came on Friday with the Ministry of Labor reported the US wages jumped from 2.9 percent in the last month from a year earlier. That was the fastest such increase in more than eight years. Higher wages eat into the profits of the companies, and could send stocks down.

Higher wages also often presage higher inflation, and the yields on bonds rose in response. That could tempt investors to shift money from shares to bonds, another reason stocks are hammered.

The yield on the 10-year Treasury note rose to 2.80 percent Tuesday, up about 2 percent since September.

“The rates are back up faster than I or anyone else expected,” said John Manley, a stock analyst at Wells Fargo Funds Management. “People are worried.”

The specter of foreign investors shift money to higher-yielding U.S. bonds on the global markets.

Foreign investors are faced with punishingly low yields in their own countries are desperately looking for a way to earn a higher return. The yield of the 10-year government bonds in Germany is only 0.68 percent, for example, more than two percentage points lower than in the US.

Germany DAX stock index fell 2.3 percent on Tuesday.

The steep stock drops over the past few days are also the dredging of old fears about the cause of the now 9-year-old bull market. It is the second longest on the album, and the profits are huge, and the prices are about quadruple. But it is also distinguished in other, less reassuring ways.

Companies play a huge role in driving prices higher, spending billions to buy back their own stock to fill a hole left by individual investors, foreign buyers and other large buyers, which usually have in the lee or sold. Index funds that buy automatically, and assigning more and more money into the fastest rising stocks, have taken on new prominence.

And while the Federal Reserve has helped push stocks higher with interest rate cuts in the previous bull runs, this time also pumped billions of dollars into the financial markets, an unprecedented stimulus.

The shift to higher rates signals that the Fed’s easy-money policy is coming to an end.

A new chairman of the central bank, Jerome Powell, took Monday. The Fed is expected to short-term interest rates controlled by the central bank at least three times this year, but that may change if there are more signs of inflation arise.

Fed hikes were responsible for three of the past four recessions.

Wells Fargo’s Manley is not afraid that the Fed will move too quickly and “strangling” the economy. Still, he says that this “transition” is spooking many investors.


AP Writer Carlo Piovano in London contributed to this report.

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