The current state of the market leaves it vulnerable to bubbles.
Many investors are currently experiencing real interest rates in the negatives. Analysts believe this has been caused by the Federal Reserve’s “policy of patience,” a term coined by chairman Jerome Powell. This low-key policy, coupled with a spike in inflation rates, is leaving the market in potentially precarious position.
“All-time low negative real rates are apt to create excesses and poor future returns,” Lisa Shalett, CIO of Morgan Stanley Wealth Management, told investors in a note obtained by MarketWatch. “We are concerned that Fed policy is divorced from the fundamentals.”
“Risks of a market bubble are growing,” Shalett said, advising investors to “watch labor market data, valuations on 2022 forward earnings and fear/greed positioning gauges, which are closing in on extreme overbought conditions.”
‘Risks of a market bubble are growing,’ warns Morgan Stanley https://t.co/bpqJ4k2DJr
— MarketWatch (@MarketWatch) November 8, 2021
“The Fed will reduce monthly $120 billion purchases of US Treasuries by $10 billion a month and $5 billion a month for mortgage-backed securities, signaling its intent to leave interest rates essentially unchanged until June,” Shalett wrote. “Almost on cue, equity investors marked the central bank’s commitment to “lower for longer” rates with yet more new all-time highs, leaving valuations stretched.”
The ongoing COVID-19 pandemic has proven to be unexpectedly profitable for the western stock market, leaving it with an excess of liquidity. It’s this excess liquidity and the Fed’s decisions on rate hikes that has left the market in a vulnerable state.
