Chamath Palihapitiya : Beware of Inflated Stocks

(Wed, 7 Oct 2020). Fed and Treasury intervention in the market is causing asset price inflation, which is the real reason why stocks are going higher.

Investors are concerned about the upcoming U.S. presidential election impacting the stock market. Chamath Palihapitiya said the stock market would continue to rise regardless of a Trump or Biden presidency. Stocks are going higher due to the Federal Reserve’s unprecedented support, which is causing asset price inflation. After a tech stock selloff in September, stocks are continuing the rally that started at the end of March. The S&P 500 is up more than 50% since March bottom and about 5% up year-to-date.

Many investors are worried that the upcoming U.S. presidential election outcome could impact the stock market. They view the election as a major risk, as uncertainty hangs over who will win, what policies the winner will implement, and whether the election will be contested.

Most acknowledge that Trump has been largely favorable to the markets because of tax cuts. A Biden win would likely mean an increase in taxes, which investors wouldn’t love.

The U.S. Presidential Election Won’t Be a Major Risk to Stocks

JPMorgan thinks investors are overestimating the risk of the upcoming U.S. presidential election, especially the chance of it becoming a contested election that drags out for months.

Who wins might not matter that much. Social Capital Founder and Chief Executive Officer Chamath Palihapitiya said on CNBC’s Squawk Box stocks will continue to rise no matter who is in the White House after the election. Stocks will continue to go up because of the Fed’s actions.

The Fed Is Causing an Asset Price Bubble

Fed and Treasury intervention in the market is causing asset price inflation. Palihapitiya believes they will have more influence in the next four years than the president:

For the next four or five years the most dominant factor I see is the combination of Treasury and the Federal Reserve and the reality is they have printed so much money that the likelihood is that we are going to continue to see asset price inflation independent of who is in the White House.

The Federal Reserve cut interest rates to near zero in one of many efforts to support the economy reeling from the coronavirus shutdown. The central bank has also created programs to provide liquidity to companies in need. The Fed said it wouldn’t raise rates until 2023 at the earliest, and it would rather let inflation run hot before tightening monetary policy. When inflation rises, investors rotate towards stocks and away from cash.

Instead of using interest rate hikes to ward off inflation before it hits, the Fed will now wait to move up until it sees inflation consistently rising above a 2% target for an indefinite period. Scott Minerd, Guggenheim’s global CIO, told Bloomberg that it was “virtually impossible” for the Fed to achieve inflation above 2% without creating an asset price bubble.

The positive effect of inflation on stocks will not last forever. Once price growth approaches its target, investors typically lower their positions in preparation for the central bank rate hike. The Fed support alone won’t be enough to drive stocks higher forever.

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