Monday 5 July 2021

Stocks expensive as economy expected to boom

The S&P 500 rose 1.7 percent last week, boosted on Friday by a report that the US economy added 850,000 jobs in June.

The persistent rise in the stock market means that stocks are now expensive.

“Valuations are rapidly approaching historically expensive levels, and some experts are worried about how high stocks are relative to their earnings,” CNN's Paul La Monica wrote over the weekend.

La Monica noted that the cyclically adjusted price-to-earnings ratio, or CAPE, is currently hovering around 38.

“That's well above levels of about 27 from late 2007 right before the global financial crisis and it's also significantly higher than the CAPE ratio of around 33 way back in September 1929 just before the historic October market crash at the onset of the Great Depression,” he wrote.

Still, some analysts remain sanguine.

“The [CAPE] ratio is less useful after a recession or a period of deep earnings growth contraction,” said Sean Darby, global head of strategy for Jefferies.

La Monica also cited Aash Shah, senior portfolio manager with Summit Global Investments, who thinks that stocks will rise with a booming economy.

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