Stock Euphoria Concerns Economists Foreign Investors Quietly Sell Shares, Fearing A Tumble

The average American’s growing taste for putting a large proportion of assets into the stock market has become a prime concern of global economists.

Only a few weeks ago, the experts were worried that Asia’s financial fizzle would provoke a major sell-off on Wall Street, leading to a U.S. and then a European recession.

That fear has receded as American investors shrugged off the tribulations of the battered Asian economies and sent shares on U.S. markets to record highs.

Now some analysts, including Swiss investment adviser Edmund Loesser, say excessive confidence in the strength of the market, as demonstrated by the refusal of U.S. investors to be rattled by the Pacific crisis, could prove to be the Achilles’ heel of the American boom.

According to Loesser, a Zurich-based consultant, foreign investors have gradually lost confidence in Wall Street’s ability to maintain an indefinite upward surge and have been steadily pulling out of U.S. stocks for the past year.

“Their retreat hasn’t been noticed much because, as they’ve left the market, more and more small American investors have come in to replace them,” he explained.

He noted that nearly a third of U.S. family assets is currently invested in shares and mutual funds - the largest percentage ever.

But Loesser argued that this poses a danger because the average investor keeps only an infinitesimal portion of assets in cash reserves and is otherwise deeply in debt because of heavy spending on consumer goods.

“Americans feel well-off because the value of the share portfolios keep surging, so they aren’t worried by how much they owe,” he said. “But the market can’t keep climbing forever.

“Once it starts going down, the small investors’ sudden realization that they aren’t as wealthy as they thought could accelerate the decline as they rush to unload their holdings.”

While conceding that small U.S. investors had kept their nerve at the height of the Asian financial storm, Loesser said there could be no guarantee they would react similarly in the future. History has shown that “investors’ stock of iron nerves isn’t limitless,” he warned.

British financial consultant Tom Bradbury pointed out that European investors started to move out of the U.S. market when they recognized that “exaggerated price-earnings ratios for most American shares meant it would be 30 or 40 years before their investments would earn enough in dividends to make a profit on what the shares cost to buy.”

Bradbury said: “It’s a simple proposition. U.S. shares cost so much now, there’s little or no chance that they will ever really be worth what investors are currently paying for them.”

He claimed that most professional American investors, such as managers of pension funds and large institutions, also had recognized the danger some time ago and were no longer pouring money into Wall Street, although they have not begun to liquidate their holdings, either.

“Small investors remain enthusiastic, and they’re the ones buoying up the stock market, practically by themselves,” Bradbury said. “When they realize their vulnerability, there could be more than a spot of trouble.”