The Fed is getting worried about the stock market – Business Insider


janet yellen glasses
Federal
Reserve Board Chair Janet Yellen.

Andrew Harnik/AP

The optimism that has swept much of Wall Street since the
election of President Donald Trump has pushed US equities to new
heights.

The SP 500 is up 10.9% since November 8, Election Day.

Additionally, the SP 500 financial sector index has gained
18.9%, buoyed by the president’s proposals for tax reform,
deregulation, and fiscal stimulus.

But this upward momentum has some at the Federal Reserve
concerned.

The minutes from the March meeting of the Federal Open Market
Committee released Wednesday showed that many Fed leaders
believed the stock market was too expensive.

From the minutes:

“Broad US equity price indexes increased over the intermeeting
period, and some measures of valuations, such as
price-to-earnings ratios, rose further above historical norms. A
standard measure of the equity risk premium edged lower,
declining into the lower quartile of its historical distribution
of the previous three decades. Stock prices rose across most
industries, and equity prices for financial firms outperformed
broader indexes.

Meanwhile, spreads of yields on bonds issued by nonfinancial
corporations over those on comparable-maturity Treasury
securities were little changed.”

This isn’t the first time the Fed has expressed concerns about
the high price tag of US equity markets. In June, during her
testimony before the Senate, Federal Reserve Board Chair Janet
Yellen said she was worried about the upward trend in stock
prices.

“Forward price-to-earnings ratios for equities have increased to
a level well above their median of the past three decades,”

Yellen said
. “Although equity valuations do not appear to be
rich relative to Treasury yields, equity prices are vulnerable to
rises in term premiums to more normal levels, especially if a
reversion was not motivated by positive news about economic
growth.”


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