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Morgan Stanley Raises Alarm Over Growing Risk of Market Bubble

The current market conditions indicate a potential bubble formation

Currently, many investors are facing negative real interest rates. Analysts attribute this to the Federal Reserve’s strategy dubbed “policy of patience,” as named by chairman Jerome Powell. This strategy, along with an uptick in inflation rates, is putting the market in a fragile position.

Lisa Shalett, the Chief Investment Officer (CIO) of Morgan Stanley Wealth Management, expressed her concerns in a note to investors shared with MarketWatch. She warned, “Historically low negative real rates could lead to excessive risk-taking and lower future returns. We worry that the Fed’s approach is disconnected from the market’s underlying conditions.”

Shalett emphasized the increasing risks of a potential market bubble and urged investors to monitor labor market data, 2022 forward earnings valuations, and fear/greed indicators, which are approaching highly overbought levels.

Shalett pointed out that the Fed plans to gradually reduce its monthly purchases of US Treasuries by $10 billion and mortgage-backed securities by $5 billion, signaling a commitment to maintaining interest rates at their current levels until June. The stock market promptly responded by hitting new all-time highs, pushing valuations to stretched levels.

The unexpected profitability of the western stock market during the ongoing COVID-19 pandemic has resulted in excess liquidity. This surplus liquidity, coupled with the Fed’s stance on interest rate adjustments, has left the market susceptible to potential risks.

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