“Asset prices remain vulnerable to significant declines should the pandemic worsen, the economic fallout prove more adverse, or financial system strains re-emerge,” the Fed said in its report.
“Equity prices plunged as concern over the COVID-19 outbreak grew, reflecting declines in both investor appetite for risk and expected income,” the Fed added.
“Equity prices relative to forecasts of corporate earnings also declined below the historical median. However, prices relative to earnings forecasts have risen since late March to levels seen before the outbreak: Prices have increased a fair bit from their trough, and analysts’ firm-level earnings forecasts have fallen in response to the economic deterioration.”
Indeed, price/earnings ratios briefly appeared to be cheap before quickly returning to historic highs.
In its report, the Fed also noted that the equity risk premium — the premium investors demand from equities over risk-free securities — is historically high, and general market conditions remain unfavorable. ...
Just four months ago that Chair Powell justified high stock market valuations by pointing to low interest rates. Now, the Fed finds itself explaining why significantly lower stock prices might be in store.
And more broadly, we’ve heard from more folks trying to emphasize the risks of losing money in the stock market over the opportunity for returns. Two weeks ago, even Warren Buffett took on a more cautious tone, saying you “have to be careful about how you bet, simply because markets can do anything.”
Time to take some money off the table or not?