May 4, 2013 in Business

Stocks looking frothy

But good news on jobs may mean higher ceiling
Bernard Condon Associated Press
 

NEW YORK – Are stocks worth buying now?

With the Dow Jones industrial average breaking through 15,000, it’s natural to worry that stocks have gone up too far. But higher priced stocks aren’t necessarily overpriced. They may still be a good deal if corporate earnings are rising fast, and you think that trend is likely to continue.

A solid April jobs report on Friday is a sign the economy is strengthening. That could lead to higher profits. What’s more, many of the traditional threats to bull markets – rising inflation and interest rates, a possible recession – don’t seem likely soon.

That said, stocks are no bargain.

A look at some forces that could push stocks higher in the coming months:

HIGHER EARNINGS: Investors cheered when employers added 165,000 jobs in April and unemployment fell to a four-year low. More people working means more money flowing into the economy. That could help companies extend a remarkable streak of ever-higher profits.

Companies in the Standard and Poor’s 500 index posted a record $102.83 earnings per share last year, or 17 percent higher than in 2007, before the financial crisis when stocks were last near this level.

ECONOMIC EXPANSION: With Friday’s jobs report, the odds for continued expansion got better. The economy has created an average of 208,000 jobs a month from November through April, above the 138,000 added in the previous six months.

The report follows news that the pace of economic growth picked up in the first three months of this year, home prices rose at the fastest pace in nearly seven years and automakers had their highest sales for April since the recession.

LOW INTEREST RATES: If recessions cause stocks to plummet, what causes recessions? In most cases it’s the Federal Reserve raising short-term interest rates because it fears high inflation from an overheated economy. Fed hikes were the trigger for three of the past four recessions.

But today, the greater fear is too little inflation, not too much. The Fed’s preferred measure of inflation rose only 1 percent in the year through March. The Fed’s target is 2 percent.

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