Some market professionals believe that the frantic short spills from GameStop and other stocks are signs of a bubble, but the Federal Reserve does not seem to be, and for this reason, investors expect asset prices to continue to rise.
Fed Chairman Jerome Powell at Wednesday’s post-briefing was asked about the potential of Fed policy to fuel bubbles in markets and homes.
Powell explained that the Fed had to use its extraordinary policy to help the economy with more than 9 million people out of work.
“It is very appropriate for monetary policy to be accommodative,” he said. Powell also said that in terms of financial stability, the Fed takes into account asset prices, the leverage effect of the banking and non-banking system, as well as the risk of financing.
“I would say that vulnerabilities to financial stability are generally moderate,” he said, adding that the Fed’s goals are also to prevent long-term damage to the economy and ensure the financial system is shock-resistant. He said he believes the period of rising house prices is temporary, and the pandemic has created an increase in demand due to people working from home.
“I think he’s reluctant to talk about specific actions and even when asked about the real estate market, he feels that some of them are specific to the idea that supply has been constrained and that there has been accumulated demand and it’s temporary,” Michael said. Arone, chief market strategist at State Street Global Advisors. “I wouldn’t expect the Fed president to acknowledge that Fed policy helps create bubbles.”
The Fed’s zero rate policy has helped fuel a mortgage boom with record lending rates. House prices rose 9.5 percent in November from a year earlier, the strongest annual growth rate in six years, according to S&P CoreLogic Case-Shiller Home Price. It is one of the strongest annual earnings in 30-year data history.
Shares were lower on Wednesday, with S&P down 2.6%, the worst loss in three months. But GameStop continued its parabolic race higher on Wednesday, gaining 135% a day. AMC increased by 300%. GameStop continued to grow on Thursday morning. Retail investors also bought from the call options at a record pace.
“An increasing majority of investors know nothing about balance sheets, financial statements and may be less concerned about the vision of management for their companies,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “They like it because it’s cheap. It’s low priced and they’ll buy it preferably with options.”
Rupkey said the behavior seems to be a bubble, and investors believe the shares will rise. “If the balloon is partly caused by Federal Reserve policy, they will not stop withdrawing money for some time,” Rupkey said.
When the pandemic hit markets hard in March last year, the Fed responded quickly to the unprecedented shock, leading to zero interest rates and running programs that provided a range of vehicles to help maintain the liquidity of financial markets.
The Fed has reversed the freezing of credit markets and the collapse of stock markets. Many of the programs are still in place, with the exception of several that were allowed to expire in December by the Treasury Department.
Arone said he is worried the Fed is making a policy mistake this year.
“The least likely mistake is to gather prematurely. I think the most likely mistake is to let a bubble form,” he said. “It’s exciting to climb, but it ends when rates start to rise.”
Arone and other stock market strategists expected a stock market pullback at the beginning of the year, following the large stock build in November. Any decline would create a buying opportunity, as the economy is expected to improve as the vaccine is launched and the fiscal stimulus begins – and Fed policy remains supportive.
As for short squeeze traders, Arone said it is a warning about bubble behavior. “What’s happening there is that a group of people on Reddit are targeting shares with a large amount of short-term interest. It’s very specific, what’s happening with AMC and what’s happening with GameStop,” he said. “But I think you have this growing class of investors, made up of very crazy people. You have this intersection of technology, zero commissions and fractional shares that creates this class of investors that is very aggressive and with these platforms can be a big group. And this is a red flag “.
He said the Fed’s light rate policy helps support stocks. “I think it’s funny when we’re here in 2021 and indeed it all started with the global financial crisis, maybe even earlier, the Fed’s manipulated interest rates below growth rates, below inflation. It supports asset prices,” he said. said.
Arone said the Fed and markets also seem at odds over the need for more stimulus. He said some investors clearly want the Fed to do more, but the Fed still retains policy measures, such as changing the duration of bonds it buys or increasing its purchases.
“I think behind the scenes, the Fed is watching the markets. They won’t recognize some of the foam in some of these places,” he said. “But you can be sure they see what’s going on and they probably don’t want to create another asset price bubble.”
During the meeting, Powell said that the latest rise in asset prices was not due to monetary policy, but to news of vaccines and tax incentives.
“It overestimates the Fed’s ability to help the economy and underestimates its ability to help markets,” said Peter Boockvar, chief investment strategist at Bleakley Global Advisors. – He keeps deviating.
Boockvar said the impact of Fed policy is clearly felt in all markets, including unwanted bonds, where yields are at historic lows and some prices are at record levels.
“They focus exclusively on the virus and don’t care about the side effects of the actions they are currently taking. Buying $ 80 billion in short-term cash, how does that translate to better growth?” he said. “Powell has been so careless about these housing price increases. It’s only temporary. Tell him that for the first time, a homebuyer trying to buy a house and continues to be overworked.”
Rupkey said the Fed is more concerned about other issues and does not see a problem yet.
“This Federal Reserve will not respond to asset prices unless they increase by another 100%. This Fed is more concerned than ever about maximum employment,” Rupkey said, “helping those on the edge of the market. work “.