

Source : AP
Last Updated: Sat, May 04, 2013 00:45 hrs

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.



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.




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

Another measure shows stocks are somewhat expensive, however.


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.




There's plenty of reason for caution, though.


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 on 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 four 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.


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.


The U.S. economy has grown between 1-2.5 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.


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