Fed creating stock market bubble by printing trillions of dollars in coronavirus relief

The $3 trillion rescue plan by the US Federal Reserve to limit the economic damage from the Covid-19 pandemic is fueling excesses across US capital markets, investors say.

The Fed has pledged unlimited financial asset purchases to sustain market liquidity, increasing its balance sheet from $4.2 trillion in February to $7 trillion currently.

Most of those purchases have been limited to US Treasuries and mortgage-backed securities, but the Fed’s pledge to bolster the corporate bond market has been enough to spur a frenzy among investors for bonds and stocks.

“Covid-19 is now inversely related to the markets. The worse that Covid-19 gets, the better the markets do, because the Fed will bring in stimulus. That’s what has been driving markets,” Andrew Brenner, head of international fixed income at NatAlliance, was cited as saying by Reuters.

The market bubbles that investors are attributing to the Federal Reserve’s fight with the pandemic include the stock market bonanza and the IPO frenzy. Analysts point out that the Fed hasn’t bought stocks as part of its financial stimulus programs, but its near-zero interest rates and credit support for large swaths of corporate America have driven yield-hungry investors back to the equity market.

Since their bottom on March 23, the S&P 500 and the Dow Jones Industrial Average have both surged over 40 percent, with the Nasdaq composite gaining nearly 60 percent. The S&P 500’s forward price-to-earnings ratio is currently 21.5 – a level last seen during the dotcom boom 20 years ago.

The stock market euphoria was followed by an initial public offerings (IPOs) frenzy.

Refinitiv international financing review data showed that a record $184 billion was raised in US equity capital markets in the second quarter. Over $8.9 billion worth of IPOs in the second quarter were priced above the target range – the highest amount since the third quarter of 2014, according to Dealogic.

“Why anyone would buy Nissans at Bentley prices is beyond me, but that’s what happens generally with any sexy IPO. Sure, the Nissan has four wheels and it’s fine transportation, but is it worth a Bentley valuation?” Richard Bernstein, CEO of Richard Bernstein Advisors, told Reuters.

Meanwhile, the US regulator’s bond-buying programs have encouraged companies to tap credit markets and made the second quarter the busiest ever for debt issuance. Some $1.2 trillion of investment-grade paper was sold in the first half of 2020, which is the highest issuance volume ever recorded by the Securities Industry and Financial Markets Association. Even though the Fed refrained from buying most junk-rated bonds, issuance was at $200 billion through June – more than double last year’s rate.

“Investment grade and high yield bonds had an incredible quarter, in terms of issuance and performance. We just continue to see more and more money flow into those markets,” said Ted Swimmer, head of capital markets at Citizens Commercial Banking. “But there’s been so much new issuance in the second quarter, you get concerned you’re not going to see a ton of new issuance in the third quarter,” he added.

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