The stock market looks spooked by the Federal Reserve.
On Wednesday, the major averages were higher before the release of the minutes from the latest FOMC meeting indicated that some Fed officials are concerned about the valuation of the stock market.
Earlier in the session, stocks were higher after another stronger-than-expected private payrolls report from data provider ADP. ADP’s report showed that in March, 263,000 jobs were added in the private sector, more than the 185,000 that was expected by economists.
Mark Zandi, chief economist of Moody’s Analytics said, “Job growth is off to a strong start in 2017. The gains are broad based but most notable in the goods producing side of the economy including construction, manufacturing and mining.”
During morning trade, the Dow had been up by as many as 170 points, but each of the major U.S. indexes closed lower with the tech-heavy Nasdaq seeing the biggest drop. The Dow lost 41 points, or -0.2%, the S&P 500 lost about 7 points, or 0.3%, and the Nasdaq fell 34 points, or almost 0.6%.
On Thursday, the main piece of economic news will be the weekly report on initial jobless claims, though investors will likely remain more focused on Friday’s big March jobs report.
Reading or listening to official Federal Reserve communications is an exercise in parsing tempered, calculated assessments of the economy and financial markets.
Which is why a seemingly benign collection of words characterizing the stock market published Wednesday piqued the attention of any in markets.
“Some [FOMC participants] viewed equity prices as quite high relative to standard valuation measures,” the minutes of the Fed’s latest meeting read.
Meaning that some members of the FOMC noted something many Wall Street strategists and others have been saying for some time — stocks are near the high end of the their historical valuation range. Look at a chart of the stock market’s price-to-earnings measure, which captures, roughly, how much investors are willing to pay for $1 of earnings, and this is an easy observation to make.
But coming from the Fed, this note carries additional weight, given that the central bank aims to be as measured in its communication as possible. This commentary on stocks also likely gives those who know Fed history well reason to pause, as former Fed chairman Alan Greenspan infamously asked if investors can know when “irrational exuberance” has begun to play a role in the price of some assets.
This phrase was later used as the title of Yale professor Robert Shiller’s canonical book on stock prices published just before the bursting of the tech bubble in 2000.
Here’s the full passage from the minutes:
In their discussion of recent developments in financial markets, participants noted that financial conditions remained accommodative despite the rise in longer-term interest rates in recent months and continued to support the expansion of economic activity. Many participants discussed the implications of the rise in equity prices over the past few months, with several of them citing it as contributing to an easing of financial conditions. A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months. In contrast, prices of farmland reportedly had edged lower, in part because low commodity prices continued to weigh on farm income. Still, farmland valuations were said to remain quite high as gauged by standard benchmarks such as rent-to-price ratios.
Elsewhere in the Fed minutes, the central bank said it would cease the reinvestment of proceeds from some of its holdings when they mature later this year.
This would begin the winding down of the Fed’s balance sheet, which currently holds about $4 trillion in assets comprised both of Treasuries and mortgage-backed securities.
Along with raising rates, bringing its balance sheet back down to size is another step towards the Fed more fully normalizing its current policy stance.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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