Yellen and Powell for investors: stocks are getting expensive

The stock market fell sharply on Tuesday, with most losses occurring at the end of the session. Declines for Nasdaq Compound (NASDAQINDEX: ^ IXIC), S&P 500 (SNPINDEX: ^ GSPC), and Dow Jones Industrial Average (DJINDICES: ^ DJI) were not as significant at around 1%, but some other market measures showed more substantial losses.

Data source: Yahoo! Finance.

Most investors focused on the testimony of Treasury Secretary Janet Yellen and current Fed Chairman Jerome Powell before the House’s Financial Services Committee. His comments did not incite a sudden crash, but they did give investors fair warning that they should not expect the explosive gains the market gave them last year to continue forever.

What past and current Fed presidents have said

As a former Fed chairman, Yellen can certainly understand the position in which Powell is now. However, it is important to note that, as part of the current administration, Yellen’s role in leading the Treasury involves a different mission and a different set of guidelines. Specifically, the Biden government has no mandate to try to balance job creation with controlling inflationary pressures, and the Treasury Secretary can therefore adopt different fiscal policy strategies than you would see the Fed chairman supporting on the political side. currency of the equation.

For the most part, however, Yellen and Powell said similar things. Yellen noted that with coronavirus vaccinations advancing at an accelerated pace, there is reason to believe that the economy will recover quickly in the near future. Powell said the Fed is ready to continue supporting a full economic recovery, with the intention of postponing any signs of tightening monetary policy until central bank officials see what he called “substantial additional progress” toward a return to equity. almost full employment and the 2% inflation target. Powell also said that investors can wait a long time before the Fed starts to withdraw purchases of assets it has made in the bond market.

Are the actions expensive?

However, what scared stock market investors came from the opinions expressed by the two government officials about the valuations. Yellen admitted that the stock market is expensive compared to traditional valuation measures. She did not see this as an immediate problem, however, suggesting that instead, as long as the financial sector has the strength to ensure that markets can function efficiently, there should be no lasting problems. Yellen’s implication is that even if markets fall, it would not pose systemic threats, unless large banks and other financial institutions do not maintain adequate levels of risk.

Powell agreed with these sentiments, noting that some parts of the stock market are highly valued, but the big banks have a lot of capital and show no obvious signs of a lack of adequate reserve levels to guard against future setbacks.

Major movements in all markets

Yellen and Powell’s comments had impacts far beyond the stock market. Bond prices soared, with 10-year Treasury yields falling significantly, to reverse part of the year’s high so far.

In the oil markets, investors responded to both testimony and news that European nations may take longer to reopen their economies than expected. The protracted blockades in Germany over the Easter holiday reflect the latest wave of COVID-19 cases, raising concerns that a delayed recovery in Europe could weaken energy demand. Oil prices fell by nearly $ 4 a barrel, falling below the $ 58 mark.

Investors will want to watch closely to see if the stocks they own seem overvalued by traditional measures. Those who invest in the long run should not necessarily change their strategies, but being aware that greater volatility may be ahead will prepare you for what comes next. Having a plan for whatever happens will be crucial if things don’t work out for the economy or markets in the way that everyone expects.