As the Dow Breaks 15,000, Is It Too Late to Buy?


By BERNARD CONDON

NEW YORK (AP) - Are stocks worth buying now?

With the Dow Jones industrial average breaking through 15,000, it's natural to worry that stocks have gone up too far. But higher priced stocks aren't necessarily overpriced. They may still be a good deal if corporate earnings are rising fast, and you think that trend is likely to continue.

A solid April jobs report on Friday is a sign the economy is strengthening. That could lead to higher profits. What's more, many of the traditional threats to bull markets - rising inflation and interest rates, a possible recession - don't seem likely soon.

That said, stocks are no bargain. Buy them only if you're willing to ride the inevitable ups and downs and hold on for a while.

A look at some forces that could push stocks higher in the coming months:

- HIGHER EARNINGS: Stock investors cheered when employers added 165,000 jobs in April and unemployment fell to a four-year low. More people working means more money flowing into the economy. That could help companies extend a remarkable streak of ever-higher profits.

Companies in the Standard and Poor's 500 index posted a record $102.83 earnings per share last year, or 17 percent higher than in 2007, when stocks were last near this level before the financial crisis.

How do stock prices compare with those earnings?

To answer that, experts look at what's called price-earnings ratios, or P/Es. Low P/Es signal that stocks are cheap relative to a company's earnings; high ones signal they are expensive.

P/Es are calculated by dividing the price of each share by annual earnings per share. So a $100 stock of a company that earns $10 per share trades at 10 times. The lower the P/E, the cheaper the stock.

There are various P/Es. Some use past earnings and other future earnings. They give a mixed picture, but together suggest that stocks are reasonably priced.

If you look at earnings from the past year, the S&P 500 is trading at 15.6. That is slightly lower, or cheaper, than the 17.2 average for this P/E since World War II, according to S&P Capital IQ.

Using forecast earnings for the next 12 months, you get a P/E of 14.2, the same as the average over 10 years, according to FactSet, a provider of financial data.

Another measure shows stocks are somewhat expensive, however.

Some investors think you should look at annual earnings averaged over 10 years instead of just one year. This eliminates any surge or fall due to changes in the business cycle. Dividing stock prices by a 10-year average of earnings yields a P/E of 23 times. That is higher, or more expensive, than the average 18.3 since WWII.

A word of warning: You shouldn't invest just by looking at P/Es. They are more guide than gospel. There have been long periods when stocks traded at lower or higher P/Es than the averages.

- ECONOMIC EXPANSION: With Friday's job report, the odds for continued expansion got better. The economy has created an average of 208,000 jobs a month from November through April, above the 138,000 average for the previous six months.

The report follows news that the pace of economic growth picked up in the first three months of this year, home prices rose at the fastest pace in nearly seven years and automakers had their highest sales for April since the recession.

Tally it up, and financial analysts see earnings for the S&P 500 rising 12 percent in the last three months of the year, a big jump from an estimated 4.8 percent gain in the first three months.

There's plenty of reason for caution, though.

For starters, analysts tend to overestimate earnings several quarters in the future, and may be doing that again. Early last year, they expected a 13-percent jump in earnings in the last three months of the year. They got 4 percent instead.

And some experts believe Wall Street is underestimating how much the sweeping federal spending cuts that kicked in March 1 are going to slow the economy, as government workers are furloughed and contractors lose business. If they're right, that could erode earnings.

Investors also have to keep an eye overseas. Half of revenues at big U.S. companies are abroad and some key economies are slowing or contracting. This can hit stocks hard, as General Electric shows.

Last month, when GE reported a 17 percent fall in revenue from Europe, its stock dropped 4 percent in a day. Many European countries are mired in recession, and the outlook has only gotten worse. Unemployment in the eurozone just rose to an all-time high of 12.1 percent.

China has put investors on edge, too. On April 15, news that it grew more slowly than expected in the first three month of this year helped push the Dow down 266 points, the biggest drop for the year.

Nervous yet?

One thing to keep in mind is that big, sustained drops in stocks - ones that end bull markets - are most often caused by U.S. recessions, and that doesn't appear likely soon.

Four of the past five bull markets ended as investors dumped stocks before the start of a recession. They sold stocks two months before the start of the Great Recession in December 2007 and a year before the March 2001 recession.

The U.S. economy has grown between 1 and 2.5 percent in the past three years. That's pitiful compared with the long-term average of 3 percent. Still, it's growth.

- LOW INTEREST RATES: If recessions cause stocks to plummet, what causes recessions? In most cases it's the Federal Reserve raising short-term interest rates because it fears high inflation from an overheated economy. Fed hikes were the trigger for three of the past four recessions.

But today, the greater fear is too little inflation, not too much. The Fed's preferred measure of inflation rose only 1 percent in the year through March. The Fed's target is 2 percent.

What's more, the Fed has said it would keep key short-term rates nearly zero until unemployment falls to at least 6.5 percent. It is 7.5 percent now.

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14 Comments

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ectullis

That's because Hussein is printing money like it's going out of style

May 06 2013 at 4:25 PM Report abuse rate up rate down Reply
mgh406

What we have now is the BERNANKE BUBBLE. When it bursts stocks will fall like a brick. All of this "FREE TRADE" and growing the world economy has left the average American to compete with people making slave labor wages while the importers are laughing all the way to their off shore banks.

May 06 2013 at 4:10 PM Report abuse rate up rate down Reply
Doug Click

yes.

May 06 2013 at 3:27 PM Report abuse rate up rate down Reply
f4180

yes , it's too late. Noone should buy ever again.

May 06 2013 at 2:12 PM Report abuse -1 rate up rate down Reply
Eddie

After reading some of the terrible advice in these comments, it's easy to see why so many people are always broke.

May 06 2013 at 1:36 PM Report abuse rate up rate down Reply
Jetncat

When the Feds stop flooding the nation with printed money the market will drop. This is not sustainable.

May 06 2013 at 12:35 PM Report abuse +1 rate up rate down Reply
1 reply to Jetncat's comment
theycallmeroy3

If you're trying to illustrate Herbert Stein's Law, you did.

" If something cannot go on forever, it will stop."

May 06 2013 at 1:18 PM Report abuse rate up rate down Reply
endlessdrip

No one can perdict the stock market. With that in mind, if you have some cash to invest and you don't need it to be liquid, buy some stock. Hang onto it for your kids and plan on never using it for yourself. If however you might need the cash, buy an annuity or perhaps just start buying U.S. Savings Bonds. The point is it's never to late to start saving. Stop buying to keep up with your neighbors. Your kids can live with less. You can live with less. Pay cash for your purchases. Cut up your credit cards.

May 06 2013 at 11:55 AM Report abuse rate up rate down Reply
carol lowery

Now would be a better time to sell rather than buy. Because the economy is still not that good, the market is probably overheated and will be due for a correction. The same thing happened when Clinton was in, we had a overheated market, stock anaylst warned that stocks were overpriced and a correction was coming which it started the last 11 months Clinton was in office. Also, the world news is not that good either.

May 06 2013 at 10:21 AM Report abuse +2 rate up rate down Reply
1 reply to carol lowery's comment
theycallmeroy3

Oh yeah? Well, that's not the tune being played on major trading floors.
Not when you're playing Icona Pop 24-7.

" I don't care!"
" I love it!"
" I don't care!"

" ... I crashed my car into a bridge!"

" I don't care!"
" I love it!"

May 06 2013 at 10:48 AM Report abuse rate up rate down Reply
rcohn95038

It would be wise to be cautious, as the employment situation is not good; more people are working part-time, and average wages are dropping, all compliments of Obamacare. Don't expect the party to last forever.

May 06 2013 at 8:43 AM Report abuse +3 rate up rate down Reply
1 reply to rcohn95038's comment
rich_paddlyrich

Corporate America has it's investments in congress. With payed lobbyist to represent them the average voters voice is drowned out by money from corporations. Corporate profits in the past 30 years have been going up while wages and health care benefits for their employees have been going down. The Obama administration has proposed a increase in the minimum wage. It will be interesting to see which party in congress will represent corporate interest or represent the voices who have been drowned out by Corporate Greed.

May 06 2013 at 10:06 AM Report abuse +2 rate up rate down Reply
1 reply to rich_paddlyrich's comment
rich_paddlyrich

Where was all these fiscal conservatives when Reagan tripled our debt? How about Bush when he doubled our debt? Raising the minimum wage would help people use less government programs, like food stamps. In the south where wages are cheap people rely more on government assistance like food stamps and welfare because cheap wages keeps them in poverty.

May 06 2013 at 3:23 PM Report abuse +2 rate up rate down
mae13rle11

The Dow will meander up to 22,000 over the next 7-8 years, assuming the world and the "little dictator guys" don't end it..........

May 06 2013 at 8:17 AM Report abuse rate up rate down Reply