Warnings Of A Frothy Market Rise Along With U.S. Stocks

U.S. stocks were on track for a new record on Thursday as Fed Chair Janet Yellen’s testimony made bulls feel even bolder than they have for most of this year. The strong gains are even more timely, given one economist’s warning that developed countries may be in or nearing frothy market territory. He highlighted the symptoms of froth he sees at this time and offered some suggestions for avoiding bubble territory as the world’s central banks look to taper off their monetary accommodation policies.

Yellen reverts to her typical dovishness

During her time as chair of the Federal Reserve, Janet Yellen has been known for her dovish tilt, although after Donald Trump entered the White House, signs of hawkishness began to appear. The Fed started to raise rates, but the bond market didn’t believe that the central bank would continue to raise rates.

Yellen’s testimony this week covered much more than interest rates, and she brought back investors’ appetite for risk by hinting that borrowing costs might rise more slowly than previously believed. On Thursday, she told the Senate Banking Committee that the federal-funds rate probably doesn’t need to increase a lot to reach “a neutral policy stance.” She made similar remarks before the House Financial Services Committee when she emphasized that the Fed would raise rates gradually.

Both days of dovish commentary triggered a fresh rise in U.S. equities and served to hand the Dow Jones its first closing record high in almost a month. The S&P 500 also surged on Wednesday and continued to tick higher on Thursday, while the NASDAQ Composite did the same.

Symptoms of a frothy market emerging

But just days before these two days of sudden increases in U.S. equities, Deutsche Bank Chief Economist Mikihiro Matsuoka warned about the growing signs of a frothy market. He said in a special report earlier this week that he believed the stock markets in developed countries are starting to show signs that they’re entering frothy territory. Goldman Sachs had similar warnings about the NASDAQ earlier this year.