Tuesday, 19 April 2016

Stocks rise on oil rebound but look expensive

After early falls, oil erased some of its losses on Monday to allow US and European stocks to finish higher.

The S&P 500 closed up 0.7 percent while the STOXX Europe 600 rose 0.4 percent.

US crude oil finished down 1.4 percent.

Earlier heavy falls in oil had dragged down Asian stocks, with earthquake-hit Japan in particular seeing a 3.4 percent fall in the Nikkei 225.

The resilience of stocks on Monday did not go unnoticed.

The turnaround “shows us the market is able to shrug off bad information more easily,” said Jonathan Corpina, senior managing director at Meridian Equity Partners.

“You can’t underestimate people’s fear of missing out” in the stock market, said Steve Sosnick, an options trader at Timber Hill.

Still, James Mackintosh at the WSJ reminded us that stocks -- and bonds -- are expensive.

“Wall Street’s favored valuation metric, price to estimated 12-month-ahead earnings, has been higher since 2004 only for a few months last year,” Mackintosh wrote. “This forward PE ratio stands at 16.7 times, higher than any time from 1985, when the data starts, until the dot-com boom really got going in 1997.”

However, Mackintosh said that investors have become “desperate” for return. “High-priced shares offer a low future return, but investors hope it will still be better than the miserable yields available from bonds.”

Mackintosh warned: “Shares were supposedly very cheap relative to bonds shortly before the financial crash, for example, before becoming very much cheaper indeed.”

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