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Are Stock Prices too High?

Has the continuing stock market rally in the aftermath of the 2008 crash run its course? US Federal Reserve Chairman Yellen says that stock valuations are quite high according to Bloomberg Business.

Federal Reserve Chair Janet Yellen, surveying the financial landscape for signs of bubbles after more than six years of near-zero rates, warned that both stocks and bonds are richly valued.

“I would highlight that equity-market valuations at this point generally are quite high,” Yellen said in Washington on Wednesday in response to a question at a forum on finance. “Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

Yellen said bond yields “could see a sharp jump” when the Fed raises its benchmark interest rate. Most Fed officials predict that will happen this year for the first time since 2006.

Are stock prices too high? If that is the case investors will be well advised to take a little off the table and hold cash until the market corrects. Warren Buffett says that it all has to do with interest rates.

Interest Rates and the Dollar

As quoted in The Guardian, Berkshire Hathaway CEO Warren Buffett says that if low interest rates persist today’s stock prices will seem low over the long term. And if interest rates increase stocks will suffer.

Warren Buffett has warned that stock prices will appear expensive if interest rates increase from their current ultra-low levels.

“If we get back to normal interest rates, stocks at these prices will look high,” said the billionaire investor, speaking at the annual shareholders’ meeting of his conglomerate Berkshire Hathaway.

Buffett, one of the world’s most famous investors, is widely followed for his advice on finance and life. With Wall Street and many European stock markets around all-time highs, his views on the US and global economy will be watched closely.

Are stock prices too high? They are if interest rates are going to rise. That all depends on the US Federal Reserve.

The Fed

The Washington Post weighs in with the opinion that job growth could cause the Fed to raise rates sooner than later.

Friday, the Labor Department is expected to report the economy added 220,000 jobs in April and push the Federal Reserve toward raising interest rates.

Meanwhile measures of core inflation-consumer prices net of volatile energy and food prices-have firmed in recent months and are approaching the Fed target of 2 percent a year. And history has taught economists that once inflation accelerates, it is very difficult to contain, strengthening the hand of hawks among Fed policymakers.

Still raising interest rates-likely not in June but perhaps by September-to moderate inflation entails great risks.

The appreciation of the dollar has taken a big bite out of U.S. growth, and increasing U.S. interest rates-when central banks in Europe, Japan and China have sharply eased monetary policy-risks pushing the dollar up even further and end the U.S. economic recovery altogether.

If the Fed raises interest rates and the worst case scenario occurs the stock market rally will be a thing of the past and the US economy will suffer. Are stock prices too high? They probably are.

Are Stock Prices too High? PPT





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