Buying stocks now may be less risky than you think
NEW YORK — Is it too late? If you’ve stayed out of stocks recently, you might be worried that you’ve missed your chance to get back in. After all, they must be expensive now that the Dow Jones industrial average has risen nearly 130 percent in four years to a record high.
A burst of hiring in February pushed stocks higher on Wall Street to close a record-setting week. Both the Dow Jones industrial average and the S&P 500 rose for a 6th straight day.The Dow surpassed its previous record Tuesday. It rose above 14,400 Friday for the first time before easing back to close up 67.58, or 0.5%, at 14,397. The S&P 500 index rose 6.92, or 0.5%, to 1,551.18.The Nasdaq rose 12.28, or 0.4%, to 3,244.37.For the year: the Dow is up 9.9%; the S&P 500 is up 8.8%; the Nasdaq is up 7.5%.Source: AP
The good news: Stocks still seem a good bet despite the run-up. The bad: They’re no bargain, at least by some measures.
Many investors obsess about stock prices. But you must give equal weight to a company’s earnings. When earnings rise, stocks become more valuable — and their prices usually rise, too. That seems to be happening now.
What’s more, some of the typical threats to stock run-ups — such as rising inflation and interest rates — seem unlikely to appear soon.
Among reasons to consider stocks:
Stronger economy: There are no signs of a recession. And that’s encouraging for stocks, which almost always fall ahead of a downturn.
Better yet, the economy may be on the verge of faster growth. The Labor Department said Friday the unemployment rate in February dipped from 7.9 percent to 7.7 percent, its lowest level since December 2008. Employers added more than 200,000 jobs each month from November-February, compared with 150,000 in each of the prior three months.
Reasonable prices: Investors like to use a gauge called price-earnings ratios in deciding whether to buy or sell. Low P/E ratios signal that stocks are cheap relative to earnings; high ones signal they’re expensive. Right now P/Es are neither low nor high. To calculate a P/E, divide the stock price by its annual per-share earnings. A $60 stock that earns $4 a share has a P/E of 15.
Optimism: A new love of stocks could prove a powerful force pushing prices up. In fact, it can push them up even if earnings don’t increase.
Some analysts say we are at the start of a “Great Rotation,” meaning investors shifting money into stocks from bonds. If that happens, stocks could soar. It’s too soon to say if it will continue.
Cheap money: Interest rates are near record lows. That’s good for stocks because it lowers borrowing costs for companies and makes bonds, which compete with stocks for investor money, less appealing. Want to kill a stock rally? Raise interest rates.