I know, seeing the title, you may be wondering many things, so here it is the announcement was not Jerome Powell increasing interest rates. I can hear your sigh of relief, so let’s continue. The Federal Reserve often voices how it feels about the current health of the economy and the stock market, and this doesn’t just happen during the FOMC meetings. With the semi-annual report from the Fed, they took time to voice some concerns about the market.
Their first worry was the new aspects of pandemic stock-trading: meme stocks and social media. With how quickly meme stocks rise and fall, the volatility concerns them as bubbles could be formed very quickly, leaving many investors to lose their investments rapidly when the share price falls. Along with that, the Fed was worried about risk management at Hedge Funds and firms on Wall Street. This was highlighted with the collapse of Archegos Capital Management, who borrowed way too much from major banks. When their positions went against them, they faced a margin call and had to sell nearly 20 billion dollars’ worth of positions. This hurt many stocks, specifically ViacomCBS and Discovery. If other funds are in the same situation, it could hurt banks and the financial system. Other than warnings about mortgage defaults and the risks of real estate, the Fed touched on the global aspect. They felt that if Europe continues to struggle with the virus, the economic impact could easily spill over into the United States, and emerging markets also posed a threat.
Although the Fed is set about interest rates, it is a fact that the reasons listed by the Fed pose a threat to the market. Stocks are known for surprising us, and this could be one in the making, but as long as the economy grows, the stock market has a warrant to continue ripping higher. Using examples from the past years could be unreliable as the market has changed a lot during the pandemic, where fundamentals aren’t valued as much. Do you believe in what the Fed is saying?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.