Sluggish U.S. Economy May Bring Equity Correction, Spence Says
The performance of the U.S. economy is probably more sluggish than reflected in stock markets, risking a correction in equities, Nobel Prize-winning economist Michael Spence said.
U.S. stock-market investors have “over processed” the stabilization of growth in the world’s largest economy, Spence said in an interview in Kuala Lumpur yesterday. The U.S. economy isn’t likely to experience a “double-dip” slowdown even as that remains a risk, said the professor emeritus of management in the Graduate School of Business at Stanford University.
“The markets have built in the short-run stabilization and green shoots, and over processed them,” Spence said. “The underlying performance of the U.S. economy seems to be much more sluggish than you would think if you just look at current asset prices.”
U.S. stocks fell the most since July last week as disappointing housing and durable goods reports raised concern that a record six-month rally has outpaced prospects for an economic recovery. The Standard & Poor’s 500 Index has soared 57 percent from a 12-year low in March.
The index closed at 1,060.61 yesterday, above the 1,037 average forecast of the 10 strategists at Wall Street’s biggest securities firms. This year’s gain has pushed valuations in the index to 20 times reported operating profits from the past year, data compiled by Bloomberg show. That’s near the most expensive level since 2004.
Federal Reserve policy makers indicated last week for the first time in more than a year that the economy is accelerating. The central bank recommitted to keep its key rate “exceptionally low” for an “extended period.”
Fed Chairman Ben S. Bernanke and other policy makers will raise interest rates when they are “fairly sure” credit is flowing to all parts of the economy and markets are functioning fully again, Spence said. He is in the Malaysian capital for the three-day Forbes Global CEO Conference, which started Sept. 28.
“I don’t think they have a predetermined notion on when they are going to do something,” Spence said. “What they do have probably is a set of indicators that tell them when it’s time to start raising interest rates.”
Filed under: money by Wolf