Allen Green & Williamson

Traders’ attention was diverted from the usual data and financials when political turmoil in Egypt captured the world’s attention in February. Just when the crisis in Egypt appeared to be ending, a surge of unrest in the Middle East from outposts like the tiny Gulf island kingdom of Bahrain and the much larger Libya sent oil prices up and stock prices down. With more upbeat news – that problems were not expected to extend into Saudi Arabia – trading calmed down and analysts in the U.S. turned their attention back to quarterly earnings and other prognostications.

Some experts, previously reluctant to show optimism regarding the market’s progress over the past year, have been expressing concern that investors may have become too bullish. On the other hand, some see positive drivers (e.g. the recent spate of positive earning reports) and note that U.S. stocks are increasingly attractive to investors as emerging markets continue to struggle. Here are some of the current talking points creating buzz around the investment world:

• Though market experts believe that the U.S economic recovery is under way, some are nervous because individual investors have jumped back into the market in such a big way. The flow of cash into the stock market has been notable since January 2011 and has reached levels that rival those well before the market crash. As a result, some analysts believe that investors might have become too exuberant too quickly, and they fear a market correction might be imminent.
• How can a return to investor confidence be a problem? It isn’t, as long as stock prices don’t outpace earnings growth. Some brokers worry that the markets could have trouble keeping their valuation whenever there is such a surge of investor buying. Analysts look to price-to-earnings ratios as a basic indicator of any given stock’s value. Currently at 1.5 percent, the overall market P/E yield is low – meaning stocks could be overvalued. Some experts believe low yields could persist, and that if they do, stocks might not generate much profit, leading to investor disenchantment and a major pullback.
• Other experts are more upbeat and forecast that the economy is in the process

of shifting its emphasis from housing and finance to other sectors – like technology and commodities – which will be the new market drivers. In this scenario, investors are expected to demonstrate continued willingness to embrace more risk – eschewing the dividend-paying blue chips for growth companies.

• Others worry that overly bullish investors might be forgetting that the recovery is only 2 years old, and that the after-effects of the housing and financial crises have not disappeared yet. For stock prices to continue to climb, the economic rebound will need to pick up the pace. If it doesn’t, investors who set their expectations too high might be disappointed. However, not all investment experts foresee a major market correction if investors pull back – suggesting that a short-term correction might be on the horizon instead.

The comments above are general observations and are not intended to take the place of expert counsel from investment and tax experts.