Some market professionals see the frantic short pressures of GameStop and other stocks as signs of the creation of bubbles, but the Federal Reserve does not seem so, and for this reason, investors expect asset prices to continue to rise.
Fed Chairman Jerome Powell, at his post-meeting meeting Wednesday, was asked about the potential of Fed policy to fuel bubbles in markets and housing.
Powell explained that the Fed has 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 in terms of financial stability, the Fed considers asset prices, the leverage of the banking system and the non-banking system, as well as the risk of financing.
“I would say financial stability vulnerabilities are generally moderate,” he said, adding that the Fed’s goals are also to prevent long-term damage to the economy and make sure the financial system is shock-resistant. He said he believes the halt in house prices is temporary and that the pandemic has generated an increase in demand due to people working from home.
“I think he refuses to talk about specific actions and even when he was asked about the real estate market, feeling like something specific to the idea that supply was restricted and that there was accumulated demand and that was temporary. ” said Michael Arone, chief market strategist at State Street Global Advisors. “I wouldn’t expect the Fed chairman to recognize that Fed policy helps create bubbles.”
The Fed’s zero-rate policy has helped drive a mortgage boom with record low loan rates. House prices rose 9.5% in November from a year earlier, the strongest annual growth rate in more than six years, according to S&P CoreLogic Case-Shiller house price indices. It is one of the strongest annual gains in 30 years of data history.
Shares fell on Wednesday, with S&P up 2.6%, the worst loss in three months. But GameStop continued its highest parabolic run on Wednesday, gaining 135% on the day. AMC increased 300%. GameStop continued to rise Thursday morning. Retail investors have also been buying money buying options at a record pace.
“A growing majority of investors know nothing about financial balance sheets and may be less concerned about the vision of the management of their companies,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “They like it because it’s cheap. It’s priced low and they’ll buy it preferably with options.”
Rupkey said the behavior looks like a bubble and investors just think the shares will rise. “If the bubble is caused in part by Federal Reserve policy, they won’t stop allocating money for a while,” Rupkey said.
When the pandemic hit markets hard last March, the Fed responded quickly to the unprecedented shock by bringing interest rates to zero and developing programs that provided an assortment of vehicles to help keep financial markets liquid.
The Fed reversed the freezing of credit markets and the stock market crash. Many of the programs are still underway, with the exception of several that the Treasury Department expired in December.
Arone said he was worried the Fed would make a policy mistake this year.
“The least likely mistake is for it to tighten prematurely. I think the most likely mistake is for them to let a bubble form,” he said. “It’s exciting to go up, but it ends when rates start to rise.”
Arone and other stock strategists have expected a stock market decline earlier this year, following the large stock build since November. Any fall would create a buying opportunity, as they expect the economy to improve as the vaccine is rolled out and fiscal stimulus is initiated and Fed policy continues to support it.
As for short squeeze traders, Arone said it is a warning of the behavior of the bubbles. “What happens is that there’s a group of people on Reddit targeting stocks with a high short interest rate. It’s very specific, what’s going on with AMC and what’s going on with GameStop,” he said. “But I think you have this growing class of very cheeky investors. You have this intersection of technology, zero commissions and split shares that creates this very aggressive class of investors and with these platforms they can be a great group. And that’s a red flag “.
He said the Fed’s easy rate policy helps support stocks. “I think it’s funny when we’re here in 2021 and it really all started after the global financial crisis, maybe even before, the Fed’s manipulation of interest rates below growth rates, below the inflation rate. It supports asset prices “. He said.
Arone said the Fed and markets also seem to be giving up on the need for more stimulus. He said some investors clearly want the Fed to do more, but the Fed is sticking to other 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 any foam in some of these places,” he said. “But you can be sure they’ll see what’s going on and they probably don’t want to create another asset price bubble.”
Powell, during the briefing, said the latest accumulation in asset prices was not due to monetary policy, but to news about vaccines and fiscal stimulus.
“It 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. “Keep deviating.”
Boockvar said the impact of Fed policy is clearly felt in all markets, including junk bonds where yields are at record lows and some prices are at record highs.
“They’re focused solely on the virus and they don’t care what the side effects are of what they’re currently doing. Buying $ 80 billion in short-term treasures, how does that translate into better economic growth?” He said. “Powell was so indifferent about these house price hikes. It’s just temporary. Tell the first buyer you’re trying to buy a house and you keep beating it.”
Rupkey said the Fed is more concerned about other issues and still sees no problem.
“This Federal Reserve will not respond to asset prices unless they go up 100% more. This Fed is more concerned than ever about maximum employment,” Rupkey said, “helping those outside the labor market.”