Fed Warns Stocks Face ‘Significant Declines’ if Pandemic Worsens
The comments below are an edited and abridged synopsis of an article by Tyler Durden
When equities closed last week after a retail-driven rush into the stock market, the Fed poured cold water on the bulls when it issued a warning that stocks and other assets could suffer significant declines should the coronavirus pandemic deepen, while commercial real estate will be the hardest-hit industry.
The Fed said that asset prices have been volatile across many markets; that risky asset prices have risen and spreads have narrowed in key markets. Asset prices are vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains re-emerge.
The Fed has to monetize over $1 trillion in debt in the next six weeks, and it needs to boost its current paltry $6 billion in daily POMO to be able to digest the coming issuance. In other words, brace for impact.
The Fed was unequivocal on the other three core risks facing capital markets, including: borrowing by businesses and households; leverage in the financial sector; and funding risk.
It noted that price declines could be pronounced in areas where valuations are high and asset values are sensitive to the pace of economic activity. It said that CRE markets are an example, as prices were high relative to fundamentals before the pandemic, and disruptions in the hospitality and retail sectors have been severe.
The Fed also found that prices of commercial properties and farmland were elevated relative to their income streams on the eve of the pandemic, suggesting that their prices could fall considerably.
Chairman Powell said the economy still faces unprecedented risks if fiscal and monetary policymakers don’t continue to act.
In an attempt to stabilize the economy, the Fed has effectively nationalized the bond markets. It’s also funneled hundreds of billions of dollars to foreign central banks via swap lines and temporary Treasury securities purchases.