Martin Feldstein: the bull run is running out of steam

Martin Feldstein, the economist who chaired US president Ronald Reagan’s Council of Economic Advisers, predicts that the bull run in stocks may soon come to an end.

909-Feldstein-634

The bull run in the stock-market may soon come to an end, Martin Feldstein, the economist who chaired US president Ronald Reagan's Council of Economic Advisers from 1982 to 1984, tells CNBC. "If it is not a bubble, it is very close" to one. Feldstein points out that "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".

Much of this can be laid at the feet of the US central bank, the Federal Reserve. "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%." As a result, the real (after-inflation) interest rate is negative, which tends to push asset prices higher. "The Fed should have started raising... rates a few years ago," he notes. By not doing so, "they created this fragile situation in which asset prices are too high."

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

But it's not just about inflation it's also a question of the overall stability of the system, he says. The Fed focuses on commercial banks and whether they have enough capital, whereas "the real risk is in the fact that the stockmarket and commercial real estate are way out of line with the prices that they should be".

If those snap, it could result in a downturn in markets and therefore in the economy. And if a recession was to occur, with rates as low as they are, the Fed currently "has no tools to offset that", he tells Fox Business.

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
Visit/510135/trade-war-ceasefire-boosts-stockmarkets
Economy

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/economy/600838/money-minute-monday-17-february-good-news-ahead-for-the-uk-economy
Economy

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
Visit/currencies/600842/eur-usd-euro-slide-against-us-dollar
Currencies

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020