The U.S. economy is growing at a painfully slow pace. Greece still threatens the euro. Chinese stocks have just pulled out of a frightening free-fall. Big companies in the U.S. are struggling to boost profits.
You might think it’s been a rough year for investors, but it’s mostly been a smooth ride – and a profitable one.
Money is flowing into bonds issued by the riskiest of companies, home prices in some big U.S. cities are soaring, shares of technology companies are still near all-time highs – even after a drop this week – and auction houses are enjoying record sales of art. A Picasso painting sold at Christie’s for $179 million in May, the highest ever for an artwork at auction, prompting one dealer to exclaim, “I don’t really see an end to it.”
Jack Ablin, chief investment officer of BMO Private Bank, thinks people have faced so many crises that they have become numb to fear. “Things have worked out,” he says, “and that has emboldened investors.”
Maybe too much.
For years, U.S. companies have kept profits rising by cutting costs to overcome slow sales. But they’re lean now and it’s getting harder to do that. In the past week, IBM, United Technologies, Caterpillar and Union Pacific fell after posting disappointing earnings or revenue for the latest quarter.
“Ultimately, there comes a point where you can’t cut more,” says Kevin Dorwin, managing principal of San Francisco-based financial planner Bingham, Osborn & Scarborough. “You’ve got to grow the top line.”
It’s gotten to the point that even the biggest bulls are conceding that, yes, after a tripling of prices since 2009, stocks are getting a tad expensive or, to use their delicate phrase, “fully valued.”
Homes in hot markets like Miami and Seattle are looking pricey, too. In San Francisco, prices have jumped 61 percent in just three years, according to the Standard & Poor’s/Case-Shiller index.
People are also putting money into “high yield” bonds, so called because the iffy companies that sell them must offer fat interest payments to get you to open your wallet. Or at least they used to. So heavy has been demand for the bonds, that these companies are paying interest of 6.6 percent, versus 10 percent four years ago.
History also suggests it’s unwise to bet against a bull market that has stretched into a seventh year. Prices have kept rising despite two Greek debt crises, a near debt default by the U.S. government, and, recently, Beijing’s failed efforts to avert a crash in its stock market.
“You can always tick off a list of worries,” says one optimist, Mike Ryan, chief investment strategist at UBS Wealth Management Americas, “but markets tend to climb a wall of worry.”
Or is it a wall of complacency?
Full article: When Scary Headlines Don’t Scare – Climbing The Wall Of Complacency (Zero Hedge)