Alan Greenspan’s `neutral’ economic report to the US Congress has failed to check the bull run. Indeed, it did the opposite. Tom Petruno reports
WE now can safely add the Federal Reserve Board chair to the fastest-growing unofficial association in America: people who believe that if you don’t have something nice to say about the United States stock market, you shouldn’t say anything at all.
Fed chief Alan Greenspan sent stock and bond markets soaring, lifting the Dow Jones industrial average by 154,93 points, or 2%, to a record 8 061,65, perhaps as much because of what he didn’t say to Congress as what he did.
In his testimony on the economy, Greenspan had the chance to raise cautionary flags about potential excessive speculation in stocks, as he did in December and again in March.
But Greenspan refrained. And by strongly hinting that he doesn’t expect to raise short-term interest rates in the immediate future, he effectively waved a red cape at the bulls.
Nobody thinks Greenspan is actually trying to encourage more people to buy stocks, of course. But it would seem that he has decided to give up lecturing investors about the risk in overpaying for equities.
And why fight the market, anyway? That has been a loser’s game for the past seven years -for most of the last 15 years, in fact.
The few true bears left on Wall Street feel all but hopeless as share prices climb ever higher.
Now the leverage is really beginning to kick in: the New York Stock Exchange says margin debt, the loan amount extended its member brokerages to customers who want to buy stocks on credit, zoomed 15% just between April and June, to a record $113,4-billion. Market Trim Tabs, a market newsletter in Santa Rosa, California, calculates that is the biggest two-month rise since 1987.
But who’s to say how high is too high for stock prices? Indeed, there are many, many good reasons for this raging bull market, and Greenspan enunciated several this week: inflation is very low and there are few signs of it reviving; economic growth is moderating (ie no boom); and worker productivity gains appear to have been significant in recent years, which is positive for corporate earnings trends.
“Greenspan was just saying everything that everybody else knows about the economy,” said James Solloway, research chief at investment firm Argus Research Corp in New York. “But it seems so much more real when the Fed chair says it.”
But with each additional advance in share prices, even the biggest bulls are growing, well, cowed. It’s hard to find a veteran analyst on Wall Street who will say something, anything, positive about stocks from a purely fundamental point of view.
More typical is Arnold Kaufman, editor of Standard & Poor’s Outlook newsletter in New York, who has seen more than a few stock- market cycles in his lifetime.
“This has to be more than a bull market now,” he says. “This is a speculative binge, a buying panic.”
But to shout that out publicly, let alone to suggest staying away from the stock market or actually bailing out, is bad for most Wall Street careers. It’s easier to say nothing, and just go with the mighty flow of money that is carrying stocks higher.
Should Gillette Co shares sell for 38 times estimated 1997 earnings per share, when the company is growing at 15% a year? No, most veteran investors would say. But some people thought 25 times earnings was too much for Gillette. Some thought 30 times was too much. They all left money on the table.
“We’re in that zone where stocks’ [gains] are feeding on themselves,” Kaufman says.
Dan Sullivan, editor of the Chartist investment newsletter, puts it another way: “Right now we’re trading pieces of paper,” as opposed to investing rationally in businesses.
Yet like millions of other investors who sense that share prices are out of sight, Sullivan isn’t selling. “I have no doubt that we are in a bubble, and that it’s going to be disastrous when it bursts. But when, that’s the question. You have to stay in until your indicators tell you to get out.”
Not surprisingly, many pros now are comparing the US market’s current surge to what happened in the Japanese stock market in 1988 and 1989. Japanese stocks were widely viewed as overvalued by mid-1988. But that didn’t stop the market from climbing dramatically all the way to December 30 1989, when the Nikkei-225 stock index finally peaked at 38 915.
Is it fair to suggest that the US market is developing into a Japanese-style bubble? Solloway doesn’t think so – not yet anyway.
The average US share’s price-to-earnings ratio is about 22, a far cry from the 80 to 90 P/Es of Japan, circa 1989, he notes. In addition, he doesn’t see the kind of bubble in US property values that accompanied the Japanese stock bubble, and which made the Japanese economy’s crash in 1990 all the more devastating.
“If anything, the true manic phase of the stock market is still ahead of us,” Solloway says.
If he’s right – and there’s no reason to think otherwise – does it make any sense to sell shares now? Most investors will probably say no. But even if Alan Greenspan has given up playing the role of Cassandra, every investor should recognise that the risks aren’t going away. Rather, they’re getting bigger with each trading session.
“It takes an awful lot of courage to be a seller today,” says Brad Perry, former chair of investment firm David L Babson & Co in Boston and a Wall Street historian. But at the very least, he says, “common sense tells you to stay away” from putting new money into stocks. – LA Times, Washington Post