Shares to thrive or dive?
by Peter Switzer
Wall Street again has defied the negativity from the trouble spots of the world and it comes as some experts argue there’s plenty of upside ahead, while others insist that overvaluations will force shares to give into gravity.
Last night on my Sky News Business Channel program, Ron Bewley, founder of Woodhall Investment Research, built a case for believing that we’re in a buying opportunity. Looking at history and adding in the forecasts of hundreds of analysts, he argued convincingly that despite the doom and gloom around, volatility readings say buying shares make sense right now.
(This interview will be shown on this website on Monday — don’t miss it.)
Meanwhile, CNBC points to famous US stock pickers who also support Bewley’s case despite 90 per cent or so rise of the stock market since the March 2009 lows.
“Stocks are cheap,” Cooperman, head of Omega Advisors, told CNBC. “The stock market is cheap relative to inflation, it’s cheap relative to its own history, it’s cheap relative to interest rates.”
The US market has a forward P/E of around 13.7 and this isn’t a sell-and-get-out level. Our market’s forward P/E has an 11 in front of it, which underlines our potential value.
However, some experts doubt the forward P/Es and they doubt the sustainability of the US recovery to keep creating rising profits and that means stocks could be expensive and not cheap.
CNBC did advance one argument that I think needs to be considered.
“Yale economist Robert Shiller’s Cyclically Adjusted P/E ratio, which looks at earnings over a 10-year period as a way to account for volatility, is at a lofty 23.7, which ‘suggests an overvaluation of 40 per cent relative to historic norms,’ said David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto."
So as you can see, we’re in the hands of the number crunchers who are both opting for big gains or big losses for shares going forward.
Moderate rises for shares
I’m placing my bets, or investments to be accurate, on moderate rises for shares to reflect the challenges for economies to grow quickly and the fact that the Yanks will one day have to start raising interest rates and paying back debt.
I reckon they will give themselves another year or so before they embrace too much responsibility and it will probably coincide with the US electoral cycle.
By the way, history suggests that years three and four of the US political cycle is good for economic growth and the stock market but I would be wary in 2013.
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Published on: Friday, March 25, 2011
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