Buy, Sell, or Crash? Fed Warns on Stocks and Look what Happens

Tuesday, April 11, 2017
By Paul Martin

by Wolf Richter
Apr 10, 2017

If history is the guide, you’re on your own.

The Fed has planted three separate warnings on high stock prices into its March-meeting Minutes, released last week. In the past, the Fed has warned on various occasions on high stock prices, with, let’s say mixed results. Stocks have crashed after warnings, and they have crashed without warnings, and they have soared after warnings.

Perhaps the most infamous warning on stock prices was when Fed Chairman Alan Greenspan on December 5, 1996, said in a speech that “irrational exuberance has unduly escalated asset values.” Stocks quaked in their boots for about one breath then soared for another three years and three months before totally crashing.

So now we’re getting a slew of Fed warnings. The most recent – three of them at once – were spread across the Minutes of the March meeting:

Broad equity price indexes rose further, leaving some standard measures of valuations above historical norms.

Broad U.S. 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.

The Rest…HERE

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