U.S. Markets closed

Is the Federal Reserve igniting a dangerous stock market bubble?

Brian Sozzi
Editor-at-Large

It’s time to go stock market bubble hunting.

Trillion-dollar tech companies are back en vogue on Wall Street (looking at you Apple, Microsoft and Amazon). A maker of faux meat, Beyond Meat, just saw its stock price explode 163% on its first day of trading. That’s despite the company having never turned a profit.

Sources Yahoo Finance have talked with suggest money managers are raising cash to get into possibly further hot new issuances such as Uber.

All of this aggressive activity raises the question: is the Federal Reserve’s patience on interest rates causing a stock market bubble? It sure could be as investors try to boost returns by using low-priced leverage, suggests one former Federal Reserve insider.

“I agree the Fed risks fomenting financial excesses,” former long-time Fed official Vincent Reinhart said Friday on Yahoo Finance’s The First Trade. Reinhardt said if inflation picks up a little bit more from current levels, the Fed could move to lift interest rates once again later this year.

Reinhart is now chief economist at Standish Mellon.

Bloated trades

Should the Fed turn hawkish again as it did in 2018, that could leave overly bullish investors holding the bag on their currently bloated trades.

“Investors will have to price out the inappropriate weight they were putting on [policy] easing,” Reinhart said.

Judging by the April jobs report released Friday, the economy doesn’t need a rate cut. In fact, it should just be left alone by both President Trump and Jerome Powell.

The U.S. economy created 263,000 jobs in April. At 3.6%, the unemployment rate hit its lowest level since December 1969 and improved 0.3% from March.

All three of the major stock indices spiked on the news. Investors likely wagered that a re-accelerating U.S. job market coupled with a patient Fed could push stocks up a wee bit more from record levels.

Buyer beware though, if Reinhart is right.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

Read Sozzi’s latest: