Hi-tech share plunge signals danger on Wall St
Saturday 22 June 1996
Yet a growing number of analysts see the recent dive on Nasdaq - down more than 7 per cent from its peak two weeks ago - as a harbinger of a serious setback on Wall Street.
They were joined yesterday by the giant Swiss investment bank UBS. The analyst Gail Dudack said in a new report that parallels between the market now and November 1983 to July 1984 when Wall Street fell 16 per cent had become "numerous and disturbing".
The Dow Jones index has climbed nearly 11 per cent so far this year. Its only setbacks have followed figures showing faster-than-expected job creation this year, which raised fears the Federal Reserve might start to raise interest rates. However, classic indicators of excessively high share price levels are flashing not just amber but red lights.
One is the ratio of bond-to-equity dividend yields, close to its 1987 pre-crash peak at 3.3. If there are further rises in bond yields triggered by the first Fed increase in interest rates or new inflation fears, share prices could tumble.
The optimistic case is that bond yields could fall if the economy turns out weaker than the markets currently expect, which would reduce the yield ratio from present danger levels.
So far, the optimistic view has prevailed. The latest Merrill Lynch survey of US fund managers showed a sharp fall since March in the proportion of investors who expected the economy to pick up, and consequently a sharp rise in the proportion planning to invest in bonds. Yet a range of other indicators suggest that US shares are near their peak, according to the new UBS report.
New issues have been running at record levels this year. According to Securities Data, which tracks "initial public offerings", they raised $15.8bn in the second quarter of this year, or about twice the annual rate set in the previous record year of 1993.
Many of this year's flotations are hi-tech stocks, making the parallel with 1983 striking. That was a boom year for bio-tech issues - of which only a handful, including Chiron and Amgen, remain as listed companies. Small technology stocks bore the brunt of the 1983/84 correction.
A further similarity is that both 1983 and 1996 have seen huge surges of investment in the stock market through mutual funds. Their net investment in US equities has amounted to $290bn at an annual rate so far this year.
That means American investors are running down their cash holdings, relative to total savings, to a record low of 31 per cent, according to Ms Dudack.
There are signs that the mutual fund inflow may be slowing, however. The May figure was $18bn, down from last December's $25.4bn.
The other key warning signal, she argues, is the growth in margin debt - or borrowing against the security of other assets to buy shares. It has reached an all-time high, and could prove a problem once share prices do start falling. If other shares have been used as securities, investors will be asked to put up more money.
Comment, page 17
- 1 Tamir Rice: 12-year-old boy playing with fake gun dies after being shot by Ohio police
- 2 To help fuel their propaganda machine against the poor, our government has now decided to redefine the word 'welfare'
- 3 Bill Cosby: Isn’t it obvious why his accusers have stayed silent up until now?
- 4 Halle Berry takes ex-boyfriend Gabriel Aubry to court for allegedly trying to make daughter look less African-American
- 5 Isis propaganda image showing 'abuse of Muslim woman by soldiers' is actually taken from Hungarian porn film
Tamir Rice: 12-year-old boy playing with fake gun dies after being shot by Ohio police
Ferguson decision: Tea Party website mocks Michael Brown's family over T-shirt typo
Michael Brown shooting: Ten things we know – or know better – now the Ferguson grand jury's work is over
Isis propaganda image showing 'abuse of Muslim woman by soldiers' is actually taken from Hungarian porn film
Derren Brown on the disappointment of coming out: 'It’s not that people react badly to it – they really don't care'
Rochester by-election: Ukip gains second MP as Tory defector Mark Reckless holds seat
'Beast of Bolsover' Dennis Skinner takes Ukip MP Mark Reckless to task moments after he is sworn in
Rochester by-election: Labour MP Emily Thornberry resigns after posting white van and England flags tweet
The young are the new poor: Sharp increase in number of under-25s living in poverty, while over-65s are better off than ever
Revealed: How the world gets rich – from privatising British public services
Exclusive: UK approved £7m Israeli arms sales in six months before Gaza conflict
iJobs Money & Business
£Attractive: Citifocus Ltd: High calibre individual with significant product d...
£Negotiable: Citifocus Ltd: Leading global bank seeks experienced credit analy...
£Attractive Package: Citifocus Ltd: High calibre individual with a high degree...
£Attractive: Citifocus Ltd: High calibre individual with superior academics an...