companies under $10 billion in market cap.
BE: The S&P 500′s P/E ratio has historically fallen in the range of nine to 20 times earnings. Where is it now?
BOWLES: It’s at 22 times earnings.
Is it time for a correction, or drop in stock prices?
BOWLES: At those levels, I think we really need a correction. Earnings growth rates are beginning to slow, and the market continues to rise. The stock market can’t continue to rise based on anything other than fundamentals, like earnings or profits. Right now bulls are looking for reasons for the rise to continue, and those reasons are disappearing. I would suggest that individual investors who are moving into the market do so cautiously. Don’t pay very high multiples for the stocks, even though they are high quality companies.
DAWNA EDWARDS: No one seemed surprised by a Dow of 8,000. Well, despite that, I believe that we might see a correction, and estimates I’ve seen say the market could come down 10%. The belief, though, is that once that occurs, the market will have cleansed itself and would then resume the upward trend.
BE: Is it time for the market to drop, or are those parameters ancient history?
NATHANIEL CARTER: We’ve already had almost 10% correction in February, and the market bounced back. Another correction would be short term because money keeps flowing into 401 (k) plans, and when investors look and see the bond market up only 3.5% year to date, they naturally turn to stocks. For the rest of the year, we’re likely to see the market upend at anywhere from 20%28% higher than last year; we’re already 23% higher now. There might not be much growth at all in the stock market in 1998. I don’t think we’re going to see a correction of the magnitude of anything near 1987; we’re more likely to see a period of plus or minus 5% from here to the end of the year.
With the overall market uncertain, does it still make sense to invest in index funds?
BE: We’ve heard that when the market has a downturn money managers do a lot better than the index. Conversely, when the market’s up it looks like a lot of money managers trail the indices. Would you recommend an index fund right now?
BOWLES: Indexing at the large end, using an S&P 500 index, is appropriate for individual investors. People failed to realize that up until three years ago, active money managers were beating the index.
CARTER: I agree that indexing is a cheap way to get diversity, but in the current environment, you should try to look for funds tracking indices besides the S&P 500–perhaps the Russell 2000–to get access to the smaller companies, particularly after large caps have been growing rapidly.
We know that when the Federal Reserve raises interest rates, the market often goes down. What do you expect from the Fed?
FRANKIE HUGHES: They’ve been quiet most of the year, except for raising rates once in February. I’m starting to hear some talk about the