Tags: martin feldstein | stock | market | bubble | fed

Martin Feldstein: Stock Market Is 'Very Close to a Bubble'

(Svitlana Zakharevich/Dreamstime)

By    |   Tuesday, 31 July 2018 03:46 PM

Harvard Economist Martin Feldstein warns that the seemingly endless bull-run in the stock market may very well come to a sudden and painful ending for investors.

“If it is not a bubble, it is very close to a bubble,” Feldstein said to CNBC about the stock market.

“The S&P 500 price earnings ratio is now more than 50% higher than it has been on average historically so that's way out of line and it makes the whole situation very fragile,” said Feldstein, President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984.

He said much of the problem was caused by Federal Reserve policy over the years.

“The federal funds rate, the rate the Fed controls directly, is less than 2% at a time when inflation expectations and actual inflation are both 2%. That means the real interest rate is negative and the Fed should have started raising interest rates a few years ago so that asset prices wouldn't be way out of line with reality,” he said.

“I think by not raising it, they created this fragile situation in which asset prices are too high,” he said.

“It is not a question of inflation, it's a question of the stability of the financial system. The Fed focuses on the commercial banks, on whether they have enough capital, but the real risk is in the fact that the stock market and commercial real estate are way out of line with the prices that they should be. So the danger is those could snap and we could see a significant downturn in markets and therefore in the economy.”

Meanwhile, Trump’s move to impose tariffs on foreign steel and aluminum and goods from China has recently rattled Wall Street, which wouldn't take kindly to a trade war.

“The markets were lulled into a sense of complacency in the first year of the president’s term,” Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management, told The Hill. “This year you’re getting the other side of Trumpism,”he said.

At the same time, Trump also has been critical about the Federal Reserve’s plans to raise interest rates.

“If all these things are good and we still have this increasingly volatile market, who gets the blame?” said Cembalest. “I think it’s fair to say that 50 percent of it is a consequence of the expectations that the Fed’s going to normalize interest rates, and the other 50 percent is the White House, pure and simple. They are snatching defeat from the jaws of victory.”

(Newsmax wire services contributed to this report).

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Harvard Economist Martin Feldstein warns that the seemingly endless bull-run in the stock market may very well come to a sudden and painful ending for investors.
martin feldstein, stock, market, bubble, fed
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2018-46-31
Tuesday, 31 July 2018 03:46 PM
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