Lisa Cook, a member of the Federal Reserve Board, warned on Monday that U.S. stock and corporate bond market valuations remain elevated, posing a potential downside risk.
In a lecture titled “An Assessment Of The Economy And Financial Stability” at the University of Michigan Law School, Cook noted that the valuation of multiple asset classes, such as equities and corporate bonds, is currently high.
She explained that the risk premiums of stocks and corporate bonds are near the lower end of their historical probability distribution. This indicates that the market has priced these assets based on very optimistic assumptions, making them vulnerable to a significant drop if there is negative news or changes in investor sentiment.
Cook also expressed concerns about nonbank loans centered on some large hedge funds.
“Some nonbank financial intermediaries (NBFIs), including some large hedge funds, have high leverage. NBFIs may also be exposed to liquidity stress that could be brought on by, among other things, bouts of market volatility,” Cook said.
As central U.S. banks have reduced the number of high-risk loans due to stricter prudential regulations, hedge funds have jumped into the market in recent years. Cook’s remarks are interpreted as concerned that these funds could amplify risks if they fall into a liquidity crisis due to worsening market conditions.
Cook is known for her dovish stance on accommodative monetary policy at the Federal Reserve. She has a permanent vote on interest rate decisions as a board member.
Her warning came amid persistent concerns inside and outside Wall Street that the New York Stock Exchange had reached a bubble state.
While the S&P 500 index has risen around 20% for two consecutive years in 2023 and 2024, there is a growing controversy over the stock market’s overvaluation on Wall Street.
David Kostin, chief U.S. equity strategist at Goldman Sachs Group, Inc., recently projected that the S&P 500 index would yield average annual returns of just 3% over the next decade.
The “Buffett Indicator,” a stock valuation metric used by legendary investor Warren Buffett, is also considered to be historically high.
Most Commented