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Fed says stock market boom, 'ebullient' investors warrant caution

EconomyMay 06, 2021 06:36PM ET
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© Reuters. FILE PHOTO: A U.S. dollar note is seen in front of a stock graph in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration

By Howard Schneider, Ann Saphir and Pete Schroeder

(Reuters) - Booming stocks, internet-driven "meme" investments and the black box of hedge fund financing pose increasing risks as the U.S. economy emerges from the coronavirus pandemic and investor appetite soars, the Federal Reserve warned on Thursday in its latest report on financial stability.

"With investors ebullient on expectations for a strong rebound, it is important to closely monitor risks to the system and ensure the financial system is resilient," Fed Governor Lael Brainard said in a statement released alongside the U.S. central bank's semi-annual report, which reiterated some longstanding concerns and highlighted new ones.

Commercial real estate remains potentially vulnerable, the Fed said, particularly after a pandemic that may dim demand for office space, and businesses and households "remain under considerable strain" due to the impact of the virus.

Of emerging concern: the possibility of a quick reversal in recent stock market gains, the proven ability of social media to drive up stock prices and just as quickly drive them down, and the worrying implications for risk management when Archegos Capital Management, a family office, failed and led to losses at several large banks.

The Fed also called out the need for "structural fixes" in money market funds that faced a run of redemptions at the start of the pandemic and had to be included in central bank emergency lending programs.

"Vulnerabilities associated with liquidity transformation at these funds remain prominent," the Fed concluded, referring to the fact that the funds offer investors the ability to cash out faster than the underlying assets of the fund can be sold.

Given the events of the last year, the situation is in many ways better than feared a year ago. Mortgage defaults by homeowners, for example, are below pre-pandemic levels because of the fiscal support rolled out for families; business debt overall is high but strong earnings, low rates, and government support "have increased the ability of businesses to service these obligations."

Banks "remain well capitalized."

NEAR-TERM RISKS

Still, the report laid out a litany of potential near-term risks to the financial system should the pandemic take a turn for the worse and derail the U.S. recovery.

Asset prices could fall, particularly imperiling highly leveraged life insurance companies and hedge funds; money market funds could see runs; and financial market stress could interact with potential risks from new digital payments systems, the report said.

If Europe cannot contain the virus and government programs are not supportive enough to offset the negative effects, some important European financial institutions could incur "notable credit losses," and in turn affect the U.S. economy and financial system, the report warned. Strains in emerging markets could also spill over to the United States.

U.S. stock indexes are at or near record highs, with the benchmark Standard & Poor's 500 index having risen more than 11% so far this year. It is about 18% higher than when the Fed released its last financial stability report in November and has nearly doubled from its low point just over a year ago when the pandemic sparked a market panic and tumbled the United States into recession.

Corporate profits have recovered broadly this year, but equity price appreciation has outpaced the improving earnings outlook. That has pushed price-to-earnings ratios, a key valuation metric, to elevated levels and raised concerns among policymakers about "reach-for-yield" behaviors among investors and traders.

Equities are not the only part of the market exhibiting froth. Risk premiums in corporate bond markets for low-rated issuers are back to levels from before the crisis.

In its November report, the Fed warned the United States may still face a wave of debt defaults and "significant declines" in asset prices because of the pandemic and recession. So far, that has not proven the case.

Fed says stock market boom, 'ebullient' investors warrant caution
 

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Comments (25)
stay woke
stay woke May 07, 2021 7:58AM ET
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fed's word and action are contrary to each other which is making everything like a casino
stay woke
stay woke May 07, 2021 7:57AM ET
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fed: print money market: inflate fed: "stop inflate u idiot" fed: keeps printing more money
Adam Paine
Adam Paine May 07, 2021 12:57AM ET
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Why did we have 15 Trillion on the books in the first place? that's a whole bunch of our tax $ being handed over to hedge funds.
perplexed76 .
perplexed76 . May 06, 2021 11:43PM ET
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Attention, please, mr. powell kindly asking market gamblers to make a little pause. Thank you.
Adam Paine
Adam Paine May 06, 2021 11:31PM ET
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120 Bil/mo QE makes no sense, unless you are trying to entice "investors" into use margin and pay interest on that margin while chasing the golden carrot. who's really winning here. The banks.
Bobster Bambino
Bobster Bambino May 06, 2021 11:08PM ET
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Need to raise rates already. Sonce when does the fed care more about their personal portfolios then the future by letting inflation run unperturbed.
Steven Jacobs
Steven Jacobs May 06, 2021 11:08PM ET
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You “want” interest rates to go up? You must have no loan or mortgage
Victor Tiger
Victor Tiger May 06, 2021 9:57PM ET
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They should worry about printing money then stock will be fine.
Steve Lora
Steve Lora May 06, 2021 9:38PM ET
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Not thefeds job to warn or encourage investors. Job is to keep inflation low as it was under Trump. Jerome has over 100 million in savings account
Josh Harvey
Josh Harvey May 06, 2021 9:38PM ET
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And it’s doing a TERRIBLE job at that
Daniel Hodel
Daniel Hodel May 06, 2021 9:38PM ET
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Trump did a great job of punishing savers. He wanted negative interest rates, but was denied. Ask japan how negative interest rates turned out.
Nicholas J Loveless
Nicholas J Loveless May 06, 2021 9:32PM ET
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Fed wants you to heed their warnings, yet will continue to pump money into the markets and the economy. How can they maintain this at the rate in which they’re doing it?
Francesco Lucchesi
Francesco Lucchesi May 06, 2021 7:09PM ET
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print print print, so easy to solve the problems we have. why work ?
vipul makani
vipul makani May 06, 2021 7:00PM ET
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Fed can’t do much so empty talks Dow 50k coming next year
franklin neversoy
franklin neversoy May 06, 2021 6:57PM ET
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It seems the futures are waiting on jobs report it will be champane or tissue for lol
Charles Edwards
Charles Edwards May 06, 2021 6:54PM ET
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Title correction: Government makes rich richer yet again and then warns of market crash so they can keep injecting more taxpayer dollars into the stock market.
Casino Crypt
CasinoCrypt May 06, 2021 6:46PM ET
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A correction in equity markets is now impossible. Don't taper and equity and real estate market balloons and forces up interest rates . I dont know where this boat is heading but I got off along time ago.
Charles Edwards
Charles Edwards May 06, 2021 6:46PM ET
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They are working over time to devalue the USD and increase the cost of living for the sheep to promote their socialist/communist agenda.
Atlantic Coast Money
Atlantic Coast Money May 06, 2021 6:26PM ET
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Jobs whisper number is over 1 million. Should send inflation and yields through the roof. Lets get this correction going. Yeehaw 🤠
JAMES CUNHA
JAMES CUNHA May 06, 2021 6:24PM ET
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...meanwhile, the Fed is printing out money like there is no tomorrow.
ben sc
ben sc May 06, 2021 5:48PM ET
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when the Fed tells you to stop buying equities you should ______
Show previous replies (1)
Max Woods
Max Woods May 06, 2021 5:48PM ET
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Buy BTC ETH & DOGE?
Jon Bal
Jon Bal May 06, 2021 5:48PM ET
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max out credit cards with cash advances, get a 2nd 3rd and 4th mortgage and buy deep out of money QQQ calls
Adrian Wooldridge
Adrian Wooldridge May 06, 2021 5:48PM ET
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Listen or buy puts
Max Woods
Max Woods May 06, 2021 5:48PM ET
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what date? 5/7? lol
Adam Paine
Adam Paine May 06, 2021 5:48PM ET
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Max Woods only when QE tapers off IMO
franklin neversoy
franklin neversoy May 06, 2021 5:07PM ET
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Leave it to the Feds to ruin the party 🤪
Casino Crypt
CasinoCrypt May 06, 2021 5:07PM ET
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this a casino - the biggest in history. Dont need moving averages or RSI to trade . Just watch the FED printed money carry the people along.
Dave Cash
Dave Cash May 06, 2021 4:55PM ET
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I know how the Fed can cool investor sentiment..
franklin neversoy
franklin neversoy May 06, 2021 4:55PM ET
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I’m afraid to ask 😕
Benji Beckett
Benji Beckett May 06, 2021 4:55PM ET
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they could stop talking, that'd do wonders
franklin neversoy
franklin neversoy May 06, 2021 4:49PM ET
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Feds worries stock values too high might cause a sell off. Ugh 🤨🥵
franklin neversoy
franklin neversoy May 06, 2021 4:47PM ET
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We will know at 5:00 cst on futures on investing . Com
franklin neversoy
franklin neversoy May 06, 2021 4:44PM ET
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We need a Goldie locks job number tomorrow but first we. See if feds ruined the premarket with their comments 🤨
franklin neversoy
franklin neversoy May 06, 2021 4:40PM ET
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The fed comments may have futures be red , they just can’t keep quiet
Mox Mox
Mox Mox May 06, 2021 4:29PM ET
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Fed says, cool the market for me before I have to taper the party
Benjamin McIntire
Benjamin McIntire May 06, 2021 4:25PM ET
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Haha fed printer go brr
 
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