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Harvard's Martin Feldstein: Trump Economy in 'Great Shape, but Very Fragile'

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By    |   Friday, 19 January 2018 02:36 PM

Harvard University economics professor Martin Feldstein said on Friday that rising interest rates could send stocks into a downward spiral.

“I would say the economy is in great shape, but very fragile,” Feldstein told FOX Business Network’s Maria Bartiromo on “Mornings with Maria.”

Even so, the economy will remain healthy as long as the market doesn’t turn down.

“I wish I had a different picture of what the risks are,” he said.

He said that will all pivot on the Federal Reserve’s interest-rate strategy.

“The market is up so much, driven by the Fed — now the Fed is reversing. It’s pushing up interest rates. It’s undoing the big buy of long-term bonds. So I think as interest rates rise, we could see the stock market go back to a much more normal price earnings ratio,”

CNBC recently reported that the U.S. stock market has added nearly $6.9 trillion in market cap since President Donald Trump was elected, already close to half of what was added in all eight years of President Barack Obama's tenure.

The market cap, based on the Russell 3000, surpassed $30 trillion for the first time last week and was at $30.6 trillion Thursday, CNBC cited Bespoke as reporting.

To put it in greater perspective, Trump lifted the Dow Jones industrial average in his first year in office more than any other president since Franklin Roosevelt, CNBC reported.

"The Dow has surged more than 31 percent since Trump's inauguration on Jan. 20, 2017. That marks the index's best performance during a president's first year since Roosevelt. The Dow skyrocketed 96.5 percent during Roosevelt's first year in office," CNBC said.

But Feldstein still has lingering doubts.

“What happens if there is this [economic] downturn, and the Fed doesn’t really have the ability to offset it?” he asked. “If we get a big downturn in the market, consumers are going to respond negatively and businesses are going to respond negatively,” he said Friday on Fox Business Network.

Feldstein, who was one of President Reagan’s top economic advisers, echoed many o the same concerns he made early in the week in a piece for The Wall Street Journal, in which he warned said stock prices will decline as the Federal Reserve raises interest rates and cuts its debt holdings.

“An excessively easy monetary policy has led to overvalued equities and a precarious financial situation,” Feldstein wrote in the Journal. “The Fed now faces the difficult challenge of trying simultaneously to contain inflation and reduce the excess asset prices — without pushing the economy into recession.”

Feldstein didn't state for WSJ.com just how much the market may decline in discussing how expensive stocks are in relation to historical norms. The S&P 500 stock index has risen 22 percent in the past 12 months to reach record highs.

“Stock prices rose much faster than profits did,” Feldstein wrote. “The price/earnings ratio for the S&P 500 is now 26.8, higher than at any time in the 100 years before 1998 and 70 percent above its historical average.”

He said P/E ratios are high even as investors expect the tax reform approved in December by Trump to boost company profits and the broader U.S. economy. Trump campaigned on a pro-business platform of cutting taxes, reducing regulation and spending $1 trillion on roads, bridges and airports.

For his part, Trump says the mainstream liberal media twists the facts and distorts reality.

"Do you notice the Fake News Mainstream Media never likes covering the great and record setting economic news, but rather talks about anything negative or that can be turned into the negative. The Russian Collusion Hoax is dead, except as it pertains to the Dems. Public gets it!" the president recently tweeted.

(Newsmax wire services contributed to this report).

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Harvard University professor Martin Feldstein said on Friday that rising interest rates could send stocks into a downward spiral.
martin feldstein, harvard, economy, trump
Friday, 19 January 2018 02:36 PM
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