Bernanke Says Stocks Fairly Valued

Andamento del mercato - 25/05/2015

In a substantial departure from now Federal Reserve Chair Janet Yellen, former Fed Chair Ben Bernanke has affirmatively stated that there are “no large mispricings in U.S securities, asset prices.” Janet on the other hand remains confident that valuations are significantly over-stretched, hence Federal Reserve caution towards raising rates. Although there is some disagreement on the pace of rate hikes, one item that all the FOMC members are unanimous on is the idea that any shift in monetary policy will likely cause dramatic volatility and instability in financial markets. A likely reason the next rate hike will not come this summer is the lack of liquidity and market depth as “sell in May and go away” takes on new meaning in the “new neutral.” High frequency trading has been listed as one of the major culprits of disappearing market depth as computer traders replace human traders, taking liquidity from markets instead of adding liquidity.

The Fed is very fearful of the above high frequency trading development. This means that any sort of surprise can leave markets in a panic scenario, similar to what was witnessed in May of 2010 during the flash crash in which all bids disappeared and the floor fell out from American equity markets. This sort of situation is best avoided, hence might be a key determinant in rate guidance going forward. On this basis, common sense and logic tell us the nearest meeting the Fed would choose to raise rates is September. September sees volume and liquidity return to markets after slow summer months, enabling markets to more capably absorb the blow dealt by higher rates. Extremely high price-to-earnings multiples and recent record closes imply that even though it might be dangerous to fight the intervention of multiple central banks, complacency is high and shares have not been this overvalued since the last technology bubble. Risking a 10% correction to make 5% is not a good risk-reward tradeoff, even for the permabulls.


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