The Federal Reserve policy has been credited often with pushing up stock prices and one research firm believes the central bank has pushed all asset prices to extreme levels. Investors with longer-term outlook should tread carefully in the financial markets, the Federal Reserve and other central banks have succeeded in making almost every major asset class in the world overpriced.
By: Jeff Cox
Published: Monday, 10 Jun 2013
Federal Reserve policy has been credited often with pushing up stock prices, but one research firm believes the central bank has pushed all asset prices to extreme levels.
"We think investors with a longer-term outlook should tread carefully in financial markets," TrimTabs said in its widely followed weekly market analysis. "The Federal Reserve and its fellow central banks have succeeded in making almost every major asset class in the world overpriced."
While the S&P 500 has climbed more than 15 percent year-to-date, other risk assets have surged as well, while the Fed has expanded its balance sheet past $3.4 trillion in efforts to spur growth.
TrimTabs cites a few: Global junk bond issuance (a record $254 billion through May); house flipping in California, which a recent Wall Street Journal report pegged at its fastest pace since 2005; and the increased creation of collateralized debt obligations, the instruments that helped create the financial crisis. They are around pre-crisis levels.
"It is amazing how quickly bubble behaviors from the last decade have come back," TrimTabs CEO David Satschi noted.
Yet it's hard to argue with success so far, and Santschi concedes that for all the concerns about where all this is going in the long term, the outlook for stocks has to remain favorable until the tide turns.
Near-term concerns include a surge in flows to leveraged exchange-traded funds and ETFs in general that are long the market—a contrarian negative signal.
The economy remains weak, with TrimTabs contending the Labor Department's estimate of 175,000 new jobs in May was too generous. The firm said its employment indicators "have turned most weaker," pointing to monthly job gains of just 135,000.
But it also believes "the longer-term outlook is favorable."
Economist Michael Pento took up the bubble theme in his latest post Monday, arguing that "inflation is very evident in stock values and has now even caused real estate prices to jump."
The author and head of Pento Portfolio Strategies also pointed to elevated oil prices as another example of the Fed and Chairman Ben Bernanke pushing an asset price into bubble territory. Crude oil, he said, is 200 percent above its two-decade average.
"The same can be said about the equity market as well," Pento said. "Stock prices are at all-time nominal highs, which the Fed counts as a victory, and as such, Mr. Bernanke is disregarding the fact that they had previously been in an unsustainable bubble."
Finally, a principal question the market will have to confront going forward is earnings.
Negative real interest rates have helped boost corporate profit levels and made it difficult to determine proper price-to-earnings ratios.
"It's virtually impossible to know the 'correct' multiple in an environment in which real interest rates are negative," Strategas analyst Jason Trennert said.
Trennert said "no one feels particularly happy" about paying 17 times earnings for stocks in such an uncertain rate environment and with revenue growth stalling.
Yet he, too, feels there's little investors can do now but go along for the ride, as all of the metrics Strategas uses to evaluate stock prices show "that multiples could be higher."
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