Overvalued Wall Street is set for a 5500 points crash'
One of the City's top economists has predicted a Wall Street slide of dire proportions, implying that US share prices are heading for a fall of between one third and one half, writes Patrick Hosking.
Professor Tim Congdon of the City investment finance house Gerrard Group argues that Wall Street is massively overvalued using any of five different measuring tools and is heading for a big fall. His analysis would translate into an unprecedented decline of between 3500 and 5500 points in the Dow Jones Industrial Average, which stands at just over 11,000. By comparison US shares fell 30% in the crash of 1987.
But Congdon, who was one of the 'six wise economists' who advised Conservative chancellors in the early 1990s, stressed he did not know when the fall might come. 'Whether it's in six months or two years or five years is impossible to say.'
London was also overvalued, he said, but not by as much. US share prices were 'stratospherically expensive' measured by price-earnings ratios, dividend yields or yield ratios, a measure of how their return compares with government bonds, he said. Each of these measures implied the need for a fall of 50% or more in share values for Wall Street to return to 'normal levels'.
Even using more-sophisticated measures, the inflation-adjusted ratio of bond yields to earnings yields for example, shares still needed to fall by 30%-40% to achieve historically average valuation levels, he said.
Congdon's warning echoes growing concern that the Wall Street bubble could burst. Bank of England governor Eddie George said yesterday there was 'concern' among central bankers that share markets were extremely strong 'and there could be an abrupt adjustment'.
The International Monetary Fund said last week the odds on a significant correction had shortened since last year and warned that a fall could drag down the US economy and other stock markets. Sushil Wadhwani, the newest member of the Bank of England's monetary policy committee, also expressed worries about Wall Street. 'We are approaching last-chance saloon. There is above-average risk associated with owning US equities,' he said.
Other economists are also concerned. The team at HSBC is forecasting 'a correction of at least 20% over the next six to nine months' - possibly triggered by a further tightening in US interest rates.
However, some economists say the bull market can go on. Abby Joseph Cohen, the celebrated Goldman Sachs equity strategist, this month raised her estimates for US corporate earnings, saying earnings would keep rising at or near their longer term average of 7% for some years to come.
¸ Associated Newspapers Ltd., 14 September 1999
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