CloseImage 1 of 3 A pedestrian glances at a TV displaying financial news in Times Square, New York, Tuesday, Feb. 6, 2018. After big swings higher and lower, U.S. stocks are up slightly in afternoon trading Tuesday as investors look for calm after a global sell-off. The swings came one day after the steepest drop in 6 ½ years. less A pedestrian glances at a TV displaying financial news in Times Square, New York, Tuesday, Feb. 6, 2018. After big swings higher and lower, U.S. stocks are up slightly in afternoon trading Tuesday as investors ... more Photo: Seth Wenig, AP Image 2 of 3 A woman walks through the front doors at the Fidelity Investments office on Congress Street as the ticker displays stock market numbers Tuesday, Feb. 6, 2018, in Boston. After big swings higher and lower, U.S. stocks are up slightly in afternoon trading Tuesday as investors look for calm after a global sell-off. The swings came one day after the steepest drop in 6 1/2 years. less A woman walks through the front doors at the Fidelity Investments office on Congress Street as the ticker displays stock market numbers Tuesday, Feb. 6, 2018, in Boston. After big swings higher and lower, U.S. ... more Photo: Stephan Savoia, AP Image 3 of 3 Why are investors so jittery? Stocks look expensive 1 / 3 Back to Gallery
NEW YORK (AP) — The economy is expanding, companies are handing out bonuses, tax rates are plunging and corporate earnings are rising.
So why are investors so jittery?
A big reason is that stocks are too expensive, says Jack Ablin, chief investment officer of Cresset Wealth Advisors. And Tuesday's gains notwithstanding, he suspects investors are finally coming to grips with this.
For five years now, stocks have risen in value twice as fast as earnings, according to a report by Ablin. Other studies based off a popular valuation measure championed by Nobel Prize economist Robert Shiller have noted stocks relative to long-term earnings haven't been this expensive since the dot-com boom nearly two decades ago.
U.S. consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations the Federal Reserve will have to quicken the pace of interest rate increases this year. The fairly strong inflation report from the Labor Department on Wednesday put more pressure on U.S. financial markets, which were spooked by a surge in annual wage growth in January. Prices of U.S. Treasuries fell on the inflation data. The dollar initially rose against a basket of currencies but later surrendered the gains. Stocks on Wall Street opened lower before erasing losses. Investors worry that inflation, which is seen as being driven by a tightening labor market and increased government spending, could force the Fed to be more aggressive in raising rates this year than currently anticipated. That would slow economic growth. The U.S. central bank has forecast three rate hikes for this year, with the first increase expected in March. "The Fed's job now is to prevent the economy from overheating," said Gus Faucher, chief economist at PNC Financial in Pittsburgh. "The Fed's task is complicated by the recent tax cuts and spending deal." The Labor Department said its Consumer Price Index increased 0.5 percent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 percent in December. The year-on-year increase in the CPI was unchanged at 2.1 percent as the large price gains from last year dropped out of the calculation. Excluding the volatile food and energy components, the CPI shot up 0.3 percent. That was the largest increase since January 2017 and followed a 0.2 percent rise in December. The year-on-year rise in the so-called core CPI was unchanged at 1.8 percent in January, also because of less favorable base effects. Economists polled by Reuters had forecast the CPI increasing 0.3 percent in January and the core CPI rising 0.2 percent. The core CPI is viewed as a better measure of underlying inflation trends. The Fed tracks a different index, the personal consumption expenditures price index excluding food and energy,which has consistently undershot the central bank's 2 percent target since mid-2012. INFLATION BUILDING UP Base effects will turn more favorable in March, which economists say would set the course for higher annual inflation readings. Average hourly earnings jumped 2.9 percent on an annual basis in January, the largest rise since June 2009, from 2.7 percent in December. A pickup in wage growth as the labor market hits full employment is expected to contribute to higher inflation this year. Price pressures are also seen being fanned by fiscal stimulus in the form of a $1.5 trillion tax cut package and increased government spending. Rising inflation could hurt consumer spending, which is already showing signs of slowing. A separate report from the Commerce Department on Wednesday showed retail sales decreased 0.3 percent in January, the largest decline since February 2017, after being unchanged in December. Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged last month after dropping 0.2 percent in December. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Consumer spending, however, remains supported by a strong labor market, rising wages and tax cuts. "Consumers can make up for lost time," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. Inflation last month was driven by gasoline prices, which rebounded 5.7 percent after falling 0.8 percent in December. Crude oil prices surged in January on strong global demand and a weaker dollar. Food prices rose 0.2 percent in January, likely reflecting dollar depreciation. The core CPI was boosted by rising rents. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, gained 0.3 percent after rising byMedia: Euronews
Just like art collectors eyeing a great painting, it turns out investors can love stocks too much, too.
"No one doubts that a Van Gogh is a beautiful piece of art, but the price you pay can be too high," Ablin says. "How much do you want to pay for earnings?"
Already before Donald Trump took office last year, professional investors who manage retirement money and mutual funds were showing a rare case of nerves, calling the market "fully priced." In the buy-buy atmosphere on Wall Street, that was as close to a call to "sell" stocks as you can get.
Even Trump, lately a big fan of the stock market gains, had his doubts, calling it a "big bubble" shortly before the election.
To be sure, there are plenty of reasons for optimism about stocks. Tax cuts and deregulation are sure to fatten profits.
Still, the markets have risen fast in response — up 19 percent in 2017 alone — and that's prompted warnings from some old time market watchers. Former Federal Reserve Chair Alan Greenspan told Bloomberg News last week that he thought stocks were in "bubble" territory.
The trigger for the latest swings in the market came on Friday when the Labor Department reported U.S. wages jumped 2.9 percent last month from a year earlier. That was the fastest such increase in more than eight years. Higher wages eat into corporate profits, and can send stocks down.
Higher wages also often presage higher inflation, and yields on bonds have surged in response. That could entice investors to shift money from stocks to bonds, another reason stocks are getting hammered.
The yield on the 10-year Treasury note rose to 2.80 percent Tuesday, up from about 2 percent as recently as September.
"Rates are backing up faster than I or anyone else anticipated," says John Manley, a stock analyst at Wells Fargo Funds Management. "People are worried."
The specter of foreign investors shifting money into higher-yielding U.S. bonds has hit global stock markets as well.
Foreign investors facing punishingly low yields in their own countries have been desperate for a way to earn higher returns. The yield of the 10-year government bond in Germany is only 0.68 percent, for instance, more than two percentage points lower than in the U.S.
Germany's DAX stock index fell 2.3 percent Tuesday.
The steep stock drops of recent days are also dredging up old fears about the underpinnings of the now 9-year-old bull market. It's the second longest on record, and the gains have been huge, with prices roughly quadrupling. But it's also been distinguished in other, less reassuring ways.
Companies have played an outsize role in driving prices higher, spending trillions to buy back their own stock to fill a hole left by individual investors, foreign buyers and other major buyers who've mostly stayed on the sidelines or sold. Index funds that buy automatically, and allocate more and more money to the fastest climbing stocks, have taken on new prominence.
And while the Federal Reserve has helped push stocks higher with interest rate cuts in prior bull runs, this time it also pumped trillions of dollars into financial markets, an unprecedented stimulus.
The shift to higher rates signals that the Fed's easy-money policies are coming to an end.
A new chairman of the central bank, Jerome Powell, took over Monday. The Fed is expected to raise short-term interest rates controlled by the central bank at least three times this year, though that could change if more signs of inflation emerge.
Fed hikes were responsible for three of the past four recessions.
Wells Fargo's Manley isn't worried that the Fed will move too fast and "strangle" the economy. Still, he says this "transition" is spooking many investors.
AP Writer Carlo Piovano in London contributed to this report.
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