Broker Check

Fed Issues Warning Over Stock Market Valuation

April 20, 2017

The release of the minutes from Federal Reserve meetings are eagerly anticipated by economists but rarely make news. The minutes are typically filled with technical data on the state of the economy and financial markets, peppered with comments from Fed staff members and governors. However, the March minutes contained a statement that has cause many investors to take notice. The minutes stated:

“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.”

“Some participants viewed equity prices as quite high relative to standard valuation measures.”

Given the Fed’s general reluctance to comment on stock market valuations, investors should take notice of these recent comments. If the Fed views high stock valuations as a factor that could destabilize the US economy, they may be more inclined to raise interest rates in an attempt to prevent a stock market bubble. In this case, the saying “don’t fight the Fed” may apply to stock, as well as bond, investors.