<html><base href="http://biz.yahoo.com/"><title>Yahoo - High P/E ratios boost bonds appeal--Fed economists</title><center><table cellpadding=2 cellspacing=0 width="100%"><tr><td width="1%"><a href="http://quote.yahoo.com/?u"><img src="http://us.yimg.com/i/fi/main4.gif" border=0 width=281 height=31 alt="Yahoo! Finance"></a></td><td nowrap><font face=arial size=-1><a href="http://quote.yahoo.com/?u">Home</a> - <a href="http://www.yahoo.com/">Yahoo!</a> - <a href="/f/bn.html">Help</a></font><br><hr size=0 noshade></td><td width="1%"><a href="http://www.online.reuters.com"><img src="http://us.yimg.com/i/dn/reuters4.gif" border=0 alt=Reuters width=140 height=21></a></td></tr></table><p> <p>[ <a href="http://www.yahoo.com/headlines/business/">Business</a> | <a href="/reports/stocks.html">US Market</a> | <a href="/industry/">By Industry</a> | <a href="/reports/ipo.html">IPO</a> | <a href="/apf/">AP</a> | <a href="/snp/">S&P</a> | <a href="/reports/world.html">International</a> | <a href="/prnews/">PRNews</a> | <a href="/bw/">BizWire</a> ]</center><p><hr><b>Wednesday August 5, 1:20 pm <small>Eastern Time</small></b><h2>High P/E ratios boost bonds appeal--Fed economists</h2>  By Isabelle Clary <p>NEW YORK, Aug 5 (Reuters) - Pricey U.S. stocks combined with lower corporate profit outlooks are likely to further weigh on equities and highlight the richer returns on Treasuries, according to senior economists at Federal Reserve banks and a financial expert.<p>``The (stock market) price-to-earnings (P/E) ratio is high compared to bond yields and compared to history. It is probably safe to say one important aspect of investors' negative psychology would be the comparison with the bond yield,'' Federal Reserve Bank of St. Louis senior economist Bill Emmons told Reuters.<p>``P/E ratios can be very, very far from their long-term average for a very long time. But it's just a matter of time until stock prices correct. In the long run, they (P/E ratios) do tend to go back to the same neighborhood,'' noted Emmons, who recently wrote on the issue in a St. Louis Fed publication.<p>The P/E ratio for the Standard & Poor's 500 stock index topped 28 in June - the highest in nearly 130 years. Despite the recent equities sell-off, the S&P 500 P/E ratio remains well above an average of 13.4 since 1870.<p>Emmons pointed out Fed Chairman Alan Greenspan has warned of the risks inherent in overpriced financial assets.<p>``The significant part of the rise in equity prices has resulted from a continuous increase in long-term expected earnings,'' Greenspan told Congress in July. ``History tells us that that is going to run into some difficulty sooner rather than later.''<p>Emmons explained stocks historically lose their appeal once their P/Es fall sharply below Treasuries yields. Current P/E ratios correspond to a yield below 3.50 percent -- much lower than current Treasuries yields of 5.10 to 5.65 percent across the term structure.<p>The Dow Jones industrial average set a record high of 9367.84 points on July 17, 1998, but has since been under pressure amid fears of disappointing U.S. earnings due to the Asia crisis. On Tuesday, the Dow suffered its worst one-day decline of the year, ending down 299.43 points to 8487.31.<p>Federal Reserve Bank of Cleveland senior economist Joseph Haubrich told Reuters expectations of continuously rising profits are essential for sustaining high stock valuations, such as those reflected in either a high P/E or a low dividend/price ratio, another gauge of market sentiment.<p>``Discounting these high profit streams was the reason why the dividend/price ratio has been at very low levels,'' said Haubrich, who last year wrote a research paper on stock market fundamentals.<p>Haubrich added that market swoons like Tuesday's indicated market sentiment has peaked.<p>``Certainly, at a certain yield differential, Treasury bonds, which are safer investments, are going to look like better investments,'' Haubrich added. ``It's the question of how you are going to reallocate your portfolio. If you don't think the return to the stocks is going to be that strong, bonds are going to look better.''<p>Owen Lamont, Professor of Finance at the University of Chicago, said the time had come for prudent investors to get out of stocks.<p>``If there ever was a time to reduce your weighting in U.S. equities now is that time,'' stated Lamont, whose research paper on equities is to appear soon in the Journal of Finance published by Ohio University.<p>``All the indicators we have say expected returns on stock market are not going to be as high. They are going to be lower,'' added Lamont, who wrote in his paper: ``forecasts of low long-horizon stock returns are caused not by earnings or dividends but by high stock prices.''<p>``There is absolutely no doubt the market is very high. What happened yesterday was tiny -- nothing. If you were to lower your stock allocation, the time is now. Index-inflation bonds look particularly good now,'' Lamont predicted.  <p><hr align=left width="33%" noshade><table border=0 cellpadding=0><tr valign=top><td colspan=3><b>Related News Categories:</b> <a href="/n/z/z0006.html">currency</a>, <a href="/reports/world.html">international</a>, <a href="/n/z/z0002.html">options</a>, <a href="/reports/stocks.html">US Market News</a></td></tr></table><hr align=left width="33%" noshade><center><form method=get action="http://search.news.yahoo.com/search/news"><input size=24 name=p> <input type=submit value="Search News"><input type=hidden name=n value=10> <a href="http://www.yahoo.com/docs/info/news_search_help.html"><small>Help</small></a></form><hr><small>Copyright © 1998 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon<br>See our <a href="http://www.yahoo.com/docs/info/gen_disclaimer.html">Important Disclaimers and Legal Information</a>.<br><a href="/f/bn.html">Questions or Comments?</a></small></center>  </html>