Some market professionals see the frenzied selling squeezes at GameStop and other stocks as signs of a bubble forming, but the Federal Reserve does not look so investors are hoping that asset prices will continue to rise.
Fed Chairman Jerome Powell, in his post-meeting briefing on Wednesday, was asked about the potential of the Fed’s policy to fuel bubbles in the markets and real estate.
Powell explained that the Fed had to use its extraordinary policy to help the economy with more than 9 million unemployed people.
“It is very appropriate for monetary policy to be accommodative,” he said. Powell also said that, with regard to financial stability, the Fed considers asset prices, the leverage of the banking and non-banking system, as well as the risk of financing.
“I would say that the vulnerabilities of financial stability are generally moderate,” he said, adding that the Fed’s goals are also to prevent long-term damage to the economy and to ensure that the financial system is resistant to shocks. He said he believed the rise in house prices was temporary and that the pandemic created an increase in demand because of people working at home.
“I think he is reluctant to talk about specific actions and even when asked about the real estate market, he feels that part of it is specific to the idea that the offer was restricted and there was pent-up demand and that is temporary”. said Michael Arone, chief market strategist at State Street Global Advisors. “I don’t expect the Fed chairman to recognize that Fed policy helps to create bubbles.”
The Fed’s zero-rate policy helped fuel a mortgage boom with record low credit rates. House prices rose 9.5% in November from the previous year, the strongest annual growth rate in more than six years, according to S&P CoreLogic Case-Shiller home price indexes. It is one of the strongest annual gains in the data’s 30-year history.
The stock fell on Wednesday, with S&P falling 2.6%, its worst loss in three months. But GameStop continued its high parabolic run on Wednesday, gaining 135% on the day. AMC rose 300%. GameStop continued to increase on Thursday morning. Retail investors have also been buying money options at a record pace.
“A growing majority of investors know nothing about balance sheets, finance and don’t give a damn about management’s view of their companies,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “They like it because it is cheap. It is cheap and they will buy preferably with options.”
Rupkey said the behavior looks like a bubble and investors expect the stock to rise. “If the bubble is partially caused by Federal Reserve policy, they will not stop distributing money for some time,” said Rupkey.
When the pandemic hit the markets last March, the Fed responded quickly to the unprecedented shock by bringing interest rates to zero and rolling out programs that provided a variety of vehicles to help keep financial markets liquid.
The Fed reversed the freeze on credit markets and the stock market crash. 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 was concerned that the Fed made a policy mistake this year.
“The least likely mistake is that they contract prematurely. I think the most likely mistake is that they let a bubble form,” he said. “It is stimulating on the way up, but it ends when rates start to rise.”
Arone and other stock strategists predicted a stock market retracement earlier this year, after the sharp rise in stocks since November. Any drop would create a buying opportunity, as they expect the economy to improve with the launch of the vaccine and fiscal stimulus – and the Fed’s policy remains favorable.
As for short squeeze traders, Arone said it is a warning of bubble behavior. “What is happening is that a group of people on Reddit are targeting stocks with a large amount of overdraft interest. It is very specific, what is happening with AMC and what is happening with GameStop,” he said. “But I think you have this class of investors in the growth of very brazen 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 they can be a large group . a red flag. “
He said the Fed’s easy interest policy helps support stocks. “I find it funny when we’re here in 2021 and it really started in the aftermath of the global financial crisis, maybe even earlier, the manipulation of Fed interest rates below growth rates, below inflation rates. he said.
Arone said the Fed and the markets also seem to differ on the need for further stimulus. He said that some investors clearly want the Fed to do more, but the Fed is holding back on new policy measures, such as changing the length of the bonds it is buying or increasing its purchases.
“I think, behind the scenes, the Fed is watching the markets. They are not going to recognize part of the foam in some of these places,” he said. “But you can be sure that they’ll see what’s going on and they probably don’t want to create another asset price bubble.”
Powell, during the briefing, said that the latest rise in asset prices was not due to monetary policy, but to news about vaccines and fiscal stimulus.
“He is exaggerating the Fed’s ability to help the economy and underestimating its ability to help markets,” said Peter Boockvar, chief investment strategist at Bleakley Global Advisors. “He keeps dodging.”
Boockvar said the impact of the Fed’s policy is clearly felt in all markets, including junk bonds, where yields are at historic lows and some prices are at record levels.
“They are focused exclusively on the virus and don’t care about the side effects of what they are doing at the moment. Buying $ 80 billion in short-term Treasury bills, how does that translate into better economic growth?” he said. “Powell was so indifferent to these increases in house prices. It’s only temporary. Tell that to a home buyer who is trying to buy a house for the first time and continues to be outdone.”
Rupkey said the Fed is more concerned with other problems and does not yet see a problem.
“This Federal Reserve will not respond to asset prices unless they rise another 100%. This Fed is more concerned than ever with maximum employment,” said Rupkey, “helping those on the margins of the labor market.”